Seabed survey work for the Hibernian Express, as the 6,021km (3,741 mile) fibre-optic link will be known, is already under way off the east coast of America.The last cables laid under the Atlantic were funded by the dotcom boom in the 1990s when telecoms infrastructure firms rushed to criss-cross the ocean.The laying of the new transatlantic communications cable is a viable proposition because Hibernia Atlantic, the company behind it, is planning to sell a special superfast bandwidth that will have hyper-competitive trading firms and banks in the City of London and New York queuing to use it. In fact it is predicted they will pay about 50 times as much to link up via the Hibernian Express than they do via existing transatlantic cables.The current leader, Global Crossing's AC-1 cable, offers transatlantic connection in 65 milliseconds. The Hibernian Express will shave six milliseconds off that time.Of course, verifiable figures are elusive and estimates vary wildly, but it is claimed that a one millisecond advantage could be worth up to $100m (£63m) a year to the bottom line of a large hedge fund.

Human beings can, and still do, send orders from their computers to the matching engines, but this accounts for less than half of all US share trading. The remainder is algorithmic: it results from share-trading computer programs. Some of these programs are used by big institutions such as mutual funds, pension funds and insurance companies, or by brokers acting on their behalf. The drawback of being big is that when you try to buy or sell a large block of shares, the order typically can’t be executed straightaway (if it’s a large order to buy, for example, it will usually exceed the number of sell orders in the matching engine that are close to the current market price), and if traders spot a large order that has been only partly executed they will change their own orders and their price quotes in order to exploit the knowledge. The result is what market participants call ‘slippage’: prices rise as you try to buy, and fall as you try to sell.

No one in the markets contests the legitimacy of electronic market making or statistical arbitrage. Far more controversial are algorithms that effectively prey on other algorithms. Some algorithms, for example, can detect the electronic signature of a big VWAP, a process called ‘algo-sniffing’. This can earn its owner substantial sums: if the VWAP is programmed to buy a particular corporation’s shares, the algo-sniffing program will buy those shares faster than the VWAP, then sell them to it at a profit. Algo-sniffing often makes users of VWAPs and other execution algorithms furious: they condemn it as unfair, and there is a growing business in adding ‘anti-gaming’ features to execution algorithms to make it harder to detect and exploit them. However, a New York broker I spoke to last October defended algo-sniffing:

lol, he has a better aim-bot than you do!

god it just kills me to think about how many smart and brilliant people are spending 16 hours a day coming up with a better arbitrage algorithm.

"I just feel incredibly lucky to be living now. What would I have been doing with my maths skills 100 years ago? Or 100 years from now? This is exactly the right time in history to have these skills. And I have them."

But I don't care. I expect to make enough money to be out of this business in a few years. I think I would like to go back to university. I have become very interested in the humanities and philosophy.

my friend used to work for a company that designed materials to help assuage successful businessmen about their guilt at having made huge amounts of money

it was a bunch of pseudophilosophical tracts that, when boiled down, said "yes, you DESERVED to make all that money! don't feel bad! if you like, give some to charity!"

I wish I could find the article, from the NYT I think, about a Ph.D. in math from Berkeley, a logician even, who took a quant job, made gobs of cash, fucked things up so that his company lost gobs of cash, quit, & ended up doing shark fishing in the Pacific, because it had the thrills to which he'd become accustomed on Wall Street.

Detective Superintendent Lee Neiles told the hearing: ‘Mr Birch had been redundant since September 2009 and had had difficulties in finding other means of employment, although the family were financially stable.’

god I *hate* the british use of the term 'redundant'. it's so callous.

this is typical police illiterately pretentious usage though. no one except a policeman would say "he has been redundant for a year". you get made redundant, and then you are unemployed. like how only police say "i was proceeding along oxford st" or "he asked myself how to get to piccadilly circus".

Adoboli (who, let me stress, has yet to enter a plea) was in exchange traded funds – which used to look like unit trusts, but have got increasingly complicated. One of the top market regulators, Mario Draghi, recently described ETFs as "reminiscent of what happened in the securitisation market before the crisis". Read that quote again: he's comparing them to sub-prime mortgages. Most of us should get very worried; rogue traders should go steaming in.

Republicans say Dodd-Frank is the root of some of today’s economic problems. It has stopped banks from lending to “job creators,” they contend, and is a direct cause of high unemployment. “It created such uncertainty that the bankers, instead of making loans, pulled back,” said Mitt Romney, the former Massachusetts governor, speaking at a South Carolina rally over Labor Day weekend where he again called for the law’s repeal.

that study sounds pretty weak but oh well i'm still always happy when people push the psychopath angle, cuz if there were a cultural and spiritual system that caused and possibly even mandated people who were not psychopaths to behave like psychopaths that system might benefit from review

The Hibernian Express will shave six milliseconds off that time.Of course, verifiable figures are elusive and estimates vary wildly, but it is claimed that a one millisecond advantage could be worth up to $100m (£63m) a year to the bottom line of a large hedge fund.

A high-speed fibre network between London and Hong Kong could help decrease financial trading times

Financial traders and law firms are set to benefit from a new low-latency network between London and Hong Kong, which can conduct data on a round trip from Europe to Asia in around 176 milliseconds.

The cable network, run by UK-based trading technology company BSO Network Solutions, has been in place for some time, but previously had to route around large parts of Russia, due to difficulties laying fibre in that country.

However, a new lower latency and higher availability ‘Transit Mongolia’ connection has helped to reduce the time of a round trip by more than 20 milliseconds during the last 12 months. Improvements have also been made at BSO’s Ancotel point-of-presence (POP) in Frankfurt and Mega-I POP in Hong Kong.

I wish they would drive through the crowd in Bentleys shouting "Pardon me, but if you'd be so kind as to step aside, I've an appointment with the president of the federal reserve. Oh, and do you have any grey poupon?"

There's some talk that that guy's a Yes Men-style satirist, but it's too hard to tell anymore.

Perrin takes note of the sneering at Wall St Occupiers:

The Times and others of their class despise democracy. Demonstrations count only in official enemy states. At home, it's unnecessary. Petulant. Naive.

How serious can these kids really be? They use laptops and iPhones to communicate and spread their message. If they were truly radical, they'd use cardboard megaphones. Hand signs. Smoke signals. Using The Man's technology is hypocritical.

If Rastani is a satirist, he's built up a somewhat convincing web presence for his stock trading stuff (although I wouldn't put it past the Yes Men or other satirists to do that). Even if he's not though, who is he, exactly? Some trader? Being a trader doesn't make you privvy to any special or secret information, and a lot of traders are idiots. He might be right, he might be wrong, but why was he being interviewed exactly?

but I mean if you have ever read a book chronicling the lives of wall street traders (and yes, even w/ the bias), you'll know why he passes the sniff test; he's just parroting what every trader out there is thinking atm.

I mean as far as I can tell from what I'm reading, I could just as easily call myself a "trader" in the sense he means it, i.e. someone who sits in his underwear and buys and sells stocks from time to time.

In an abstract sense, we know what roles financial institutions fulfil. In particular, (i) financial institutions avoid duplication both when monitoring loans and collecting information, (ii) they help to smooth consumption, and (iii) they provide liquidity.6 There are many enjoyable descriptions of some activities enacted in the financial sector that seem hard to reconcile with the laudable tasks thought of by economists. Moreover, knowing what the tasks of the financial sector are in theory does not tell us whether those tasks are fulfilled efficiently and at the right price. Nor does it tell us why the income earned by the financial sector has increased so much. As pointed out by Philippon (2008), in the 1960s outstanding economic growth was achieved with a small financial sector. Has it become more difficult to obtain information so that we now need to allocate more resources to the financial sector?

final paragraph does not go far enough, but it is still remarkable to see it published from this corner

Kevin Phillips, author of Nixon's Southern Strategy and hence of much of what ails the U.S., has in the past decade brought much attention to the "financialisation" of the U.S. economy and its parallels with the late stage of other global empires like Spain and Britain. It's worth searching for his shorter essays on the topic (search "Kevin Phillips financialisation") even if you aren't inclined to read his mea culpa trilogy about the colusion of financialization, resource scarcity, and the Americal Christian fundamentalist movement in bringing about the end of our era's empire.

I'd link them here, but this hotel's painfully slow wi-fi + the hassle of bbcode on an ipad are conspiring to make my posting a painful exercise.

I commended Satyajit Das 1997 Traders, Guns and Money in the undersubscribed book of the aughts poll as my favorite non-fiction book. He has a new one out entitled Extreme Money, also funny, bitter, and dense with references (he's the Dennis Miller of derivatives/finance writers) that is a nice complement to the Bookstaber above.

I see UBS rogue trader Kweku Adoboli studied the same subject at the same university as my least favourite ex, probably the year below him. I don't know whether to wonder if they met or just observe that they are clearly all terrible people

meanwhile the current bf used to work as a software engineer for some stock exchange trading software/network company and it was the worst place he's ever worked for the sheer amount of bullying to work twice your contracted hours for no extra pay, meet unreasonable deadlines, get sent away on business at the weekend (again, for no extra pay and with no expenses paid). and it wasn't any better paid than any other IT job

(in case anyone wondered how he came to have this job, the software team had previously been a little independent not-specifically-financial software company who got bought out by a finance team, and he got out as soon as he could after seeing what the new regime was like)

this one sticks out: “We used to rely on the public making dumb investing decisions,” one well-known Manhattan hedge-fund manager told me. “but with the advent of the public leaving the market, it’s just hedge funds trading against hedge funds. At the end of the day, it’s a zero-sum game.” Based on these numbers—too many funds with fewer dollars chasing too few trades—many have predicted a hedge-fund shakeout, and it seems to have started. Over 1,000 funds have closed in the past year and a half.

That article is cute, but basically just a vehicle for bank PR. Bove is seriously a joke at this point. Attributing the economic pain that banks are feeling at the moment to Dodd-Frank is beyond silly. More prop positions in the last year would probably have just meant more losses. Either they're just really selectively quoting Dimon, or somebody convinced him that he shouldn't necessarily insult everyone all the time (cf. http://blogs.wsj.com/marketbeat/2011/09/12/jamie-dimon-declares-basel-bank-capital-rules-anti-american/)

well i think there's a middle ground between 'dodd-frank changed everything, the glory days are over' and 'dodd-frank will change nothing, wallstreet is exactly the same'. 'don't like your bonus? quit' is a genuine change of tone, even if it's on some level a pr stunt, at the very least it's the *right* pr stunt. the industry is going to employ fewer people and increased regulations can't have *no* effect. and I think the american public, esp the younger generation, has soured on finance to an extent that might itself affect things. this is gonna continue, esp if romney gets the nomination. that said, I don't like the 'well, that's the end of that story' tone of the article.

So in return for hundreds of billions of dollars in public funds used to keep the financial system from going under, the banks will emerge from this crisis largely unscathed. One reason for this is Wall Street’s skill at lobbying, and its ability to spread huge amounts of cash around Washington. As Public Citizen documented, between 1998 and 2008, Wall Street spent $5 billion in campaign contributions and deployed 3,000 lobbyists across Capitol Hill to get its way. While $5 billion sounds like a lot, it was less than a third of the Goldman Sachs bonus pool for 2009, and spread out over a decade. Wall Street has a lot of money, and Congress can be bought on the cheap.

But, as I argued earlier, Wall Street also represents the commanding heights of the economy, the central mechanism by which ruling class economic power is formed and exercised. It’s only surprising to people who don’t understand this that Washington dances so faithfully to the bankers’ tunes.

...Thanks to a small band of people who moved into a private park near Wall Street last September 17, political discourse and activism have taken the most hopeful turn that I can remember. I have my reservations about the ideological orientation of a lot of the Occupiers. And it’s hard to know whether this spirit will survive the winter—or the banalizing tendencies of presidential election campaigns. But I’m going to bracket that for now and admit to more than a shred of hope that things are turning in a seriously better direction. Finally.

“Newspapers -- I went and got this one day just for fun -- 42 percent payout ratio, which I just think is just damned outrageous.”

“Worse than that, you don’t even make any money!” Dimon said, directing his comments to those in the media covering the company’s investor day and drawing laughter from his audience. “We pay 35 percent. We make a lot of money.” JPMorgan posted $19 billion in profit last year.

Despite the difficult environment, New York firms paid roughly $20 billion in year-end cash compensation to their employees. The average bonus was $121,150, down just 13 percent from the year before as the head count shrank. In 2006, the year before the financial crisis, the average investment bank employee took home a bonus of $191,360.

this is not just a Goldman Sachs problem, but a Wall Street problem. Goldman was not alone in selling clients CDOs stuffed with shaky subprime mortgages, for which it paid the SEC $550 million a couple of years (and two Greg Smith bonuses) ago. Nor was it alone in pumping Russia full of debt in the late 1990s, nor was it alone in parachuting out of the market ahead of its clients in 1929.

Of course, this won't change the view of Republicans and the likes of Geithner and others.

like i said in another thread, if you started at Goldman Sachs when Henry Paulson was running things and you're looking at that as some sort of golden era of ethics and integrity, then you've wearing some pretty strong blinders or have a strange definition of ethics and integrity.

it is good that someone who was on the inside is taking a few good kicks at an obvious villain in a relatively well-respected and well-read forum. also, i don't want to jump on him b/c i'm positive that as we speak there's an army of well-paid flunkies working overtime and at Goldman Sachs's behest to tear him down as we speak.

plus, i hope the he's got a nice stash of "fuck you" money tucked away somewhere ... or pictures of some Goldman Sachs bigwig doing something unspeakably vile (other than what they've done to their investors, the American taxpayers or the world-at-large).

this story reminded me of this bit from a a long Goldman article the Times (UK) did a couple years ago:

[Brian Griffiths] is one of the bank’s international advisers and also acts as company pastor. ‘I had one guy who came to see me — I thought about his career — but he wanted to talk about the morality of banking. That was a long conversation,’ Griffiths recalls.

IDK I think maybe people have started to read Matt Taibbi a little too literally? It's possible that things actually seemed better at one time at GS, or that not every investment banker and trader and manager in every department had an alter to satan on his desk at which he promised to screw over clients in every way possible.

Everyone knows there are sophisticated clients and "sophisticated clients." Your client trust shtick is tailor made to fleece the latter.

This point needs to be made more. There's a HUGE difference between a hedge fund and an icelandic municipal pension fund. It's basically the larger scale version of why boiler room guys love lawyers and doctors as clients -- professionals with a high estimation of their own intelligence and some real money to invest, but whose professions actually don't require them to have any financial or investing acumen, so they're easily suckered.

Anyway I don't think Goldman is doing anything that different than anyone who trades in specialist merchandise (be it antiques, art, or whatever) just that they do it on a larger scale. If you don't know anything about antiques and you go shopping for something, you're likely to overpay, because only an expert really knows how much these things are worth. It's nice to think the salesman will sell it to you for what it's really worth, but perhaps a bit naive?

Actually, something I kind of don't get about investment banking: once a bank is both selling and trading for its own account, isn't it almost by definition betting against anything it sells? Like, GS has investment product X; if it thinks X is such a good investment, why not hold onto it? I'm not talking about underwriting, which is a huge part of their business, but investments where GS actually takes a position and then later sells the position to a "client" -- why the fuck would you ever want to buy what they're selling in that circumstance, if GS is really so smart?

I mean I guess there are other reasons to sell things -- liquidity, short-term versus long-term, appetite for risk, etc. But the whole thing still sounds like a very funny business model to me, and this would be equally true for any investment banking firm.

I thought the whole issue there was that they were trading against the clients with their own (ie., Goldman's own) money - not with the clients' money. If I was to put that in terms of the antiques dealer analogy, that would be more like selling a counterfeit antique - clearly wrong and illegal because it involves lying about the merchandise.

hurting, if gs feels like they have too much apple stock and owning more isn't worth the risk, and you feel like you don't have enough tech stocks and that position might be risky, both sides can gain. in theory it does not have to be a zero sum game.

Don I think you are getting confused, although that bloomberg article itself is somewhat confusingly written. I believe if they WERE a hedge, that would be more defensible, since any investment bank would hedge its positions to "reduce risk." The problem is that if they weren't a hedge but a "bet," at least according to the critics making that argument.

Uh, well I was making a point badly (although I sense you know what I was trying to say.) My bad.

From afar, selling securities to a client and then turning around and shorting those securities (as a hedge against their own long mortgage portfolio) isn't quite the level of sophistication in most specialist merchandisers. It's that level of speciality I think that separates traders in a hedge fund from an antique dealer. Seems like a lot of the positions that GS takes are with pretty complex instruments.

That's a good point. Antiques dealers can't go short, afaik. So it's a bit of a different ballgame. Also, obv much bigger stakes are involved. I was mainly talking about the client/counterparty distinction and how it's a grey area.

ha, when i saw "goldman nuns" in the url i thought itnwas a reference to "some get shot locked down and turn nuns/cowardly hearts and straight up shook ones." like greg smith had "turned nun" #morningthoughts

We'll say the Bankers loan the King a million gold coins, each worth "ten" and he agrees to pay them back "twenty" for every "ten" he recieved. In one scenario, the Bankers just sit around waiting for their million "twenties" to dribble back in from the Exchequer, until they're all paid. Fine. They will make 100% profit. But they have to wait for it until the King coughs it up.

The smart Bankers realize that the King's promise to pay back is worth something. People trust it, sort of. They decide to monetize this promise to repay by dividing it up into twenty million notes, each worth "one". This is what the King promised, after all. Now they turn around and make loans, but instead of lending gold coins (the King has most of them atm), they lend these notes. They are as good as gold, because hey the King would never default, amirite?

The clever bit is that they lend all these "good as gold" notes at interest and announce they will take either gold coins or these notes back as payment for the principal and the interest. History ensues, to much hilarity.

in any event I liked this exchange from an interview with a hedge fund director:

Q. What do you think in general about the influence of people with your means on the political process? You said shame on the politicians for listening to the CEOs. Do you think the ultrawealthy have an inordinate or inappropriate amount of influence on the political process?

A. I think they actually have an insufficient influence. Those who have enjoyed the benefits of our system more than ever now owe a duty to protect the system that has created the greatest nation on this planet.

So, basically, the king wanted 1.2 mil. He gets some dudes together and names them the B of E, and they loan him 1.2 mil. Now, they own 1.2 mil in debt, payable from the king to them. They issue notes representing some portion of this debt. Now they can do whatever they want with these notes -- buy things, build little paper hats and boats, anything. You may have noticed that I said "buy things." That debt from the king, since it's backed by the power of the royal estate, is a pretty good fungible currency -- good as gold, so to speak. And one thing you can do with currency, especially if you're a financier, is instead of buying things yourself, lend it to other people so they can buy things and eventually pay you back with interest. So that's the B of E. And it's a good story to think about when considering fiat money.

xposts: Ok, I think that makes sense with what I thought to begin with. There was just something confusing to me about the idea of loaning out what is essentially debt. Except in a weird way it seems like the currency ceases to have its debt connotations as it circulates, because people stop expecting "repayment" from the king.

So then what motivates the Bank of England to lend money to the king without interest?

I guess it just sounds like initially it would be hard to convince people to not only take these notes but actually pay interest to the bank of england on them. But I suppose the promise of the king was worth a lot, hence "fiat currency"

That all makes sense. But I think here's what's strange about it: BOE loans the King money. BOE issues "promise to pay" notes to BOE, which BOE in turn can lend out to third parties. But the result is that the King never actually has to repay the principal of his loan.

in terms of trust, prob also remembering England was much smaller then (about 5 million, London half a mil) & traders, merchants, financiers would be way more likely to know each other personally + more able to assess trustworthiness and solidity of these plans - who else is in? Are they stupid? Who do they know?

And people were suspicious of notes I think - they're mocked into the 1730s at least.

Well yes, and my understanding is that banknotes under non-central-banking regimes were even more suspect. But I'm just trying to get my mind around the initial transaction and how these notes were created I guess. Like BOE lends money to the King, the King issues promises to pay that he will literally never fulfill, and then BOE lends out those promises. A strange arrangement.

As far as I know the loans were repaid eventually. The notes issued by the B of E were backed either by a claim on the royal debt, or by gold. On the other hand, even while individual loans were typically repayed, often this was accomplished by rolling over the debt into new loans. Think of modern treasury bonds, for example. They all pay off when they come due -- but there's always a large amount outstanding, and part of the issue of new debt goes towards paying off debt coming due. There's nothing especially tied to royal or governmental fiat about this either -- the same thing is true for bonds issued by most companies, or loans made to them.

The legit sources I've seen on a quick google (this is an interesting topic!) don't go into details of exactly what happened to each individual loan, but they do tend to confirm that these were like real loans that not only had interest payments but a genuine claim on principal. The only source for the "never intended to be repaid" characterization is like ron paulish fringe sites.

yeah, I'm not used to reading statutes, but looking at the full version i think there are also systems of annuities built into the act - so there's income from various customs sources, and investors get paid back from that.

So to get back to the original point, I'm just trying to understand whether what Graeber was saying about the origins of British money is accurate and not overly reductive, and more broadly whether the foundations of his ideas about debt and money are really well-grounded.

It's a mix of correct and incorrect, I think. The specific bit you quoted was fine, but then look at this: "Just as the King can never repay his debt to the Bank of England, or else the British currency system would collapse, the US has to maintain a national debt – as indeed, it always has, we've always been in arrears since independence – or there'd be no money. (Or if you want to be technical, private banks would have to make up all the money by making loans, but of course, at the moment, our big problem is that they aren't doing that.)"

And y'know, technically, the debt was payed back as far as I know. But then more debt was borrowed. And there was nothing magically different about a king doing it or some merchant named Joe or whatever doing it except the king had more means to pay it back. And I think he's even more off about the origins of the u.s. national debt since we didn't have a natl. govt. backed currency until like the civil war (though of course there was natl. debt prior to then -- it just wasn't coupled to a natl. currency). And prior to the war of independence the individual colonies already issued paper -- and the crown trying to stop that was one of the events leading up to the american revolution actually. The coinage act (after the revolution) didn't print paper, but produced metal coins with intrinsic value. Meanwhile the first bank of the u.s. only made short-term loans to the govt. and mainly loaned to others.

Ok, that's a digression, but anyway, it sort of makes the point that Graeber plays fast and loose in sort of common ways, and I think he confuses causality sometimes too. I thought there was good material in parts of his book, but I honestly couldn't extract a straightforward set of "ideas about debt and money" except that he's consistently working to put the state front and center, which is a useful corrective to thinking about the market as existing ex-nihilo, but often goes too far.

Just grasp that a fiat currency is much more elastic than a currency pegged to a metal. It increases both the supply and the velocity of money, and therefore it increases and speeds up economic activity. A well-managed fiat currency strengthens an economy.

A return to the gold standard would be a catastrophe far worse than the hyperinflation the gold bugs seem to fear. It would not only shrink the money supply, it would slow down the velocity of money to a snail's pace as deflation set in. There would be a cash famine of epic proportions.

Ok, that's a digression, but anyway, it sort of makes the point that Graeber plays fast and loose in sort of common ways, and I think he confuses causality sometimes too. I thought there was good material in parts of his book, but I honestly couldn't extract a straightforward set of "ideas about debt and money" except that he's consistently working to put the state front and center, which is a useful corrective to thinking about the market as existing ex-nihilo, but often goes too far.

Just grasp that a fiat currency is much more elastic than a currency pegged to a metal. It increases both the supply and the velocity of money, and therefore it increases and speeds up economic activity. A well-managed fiat currency strengthens an economy.

A return to the gold standard would be a catastrophe far worse than the hyperinflation the gold bugs seem to fear. It would not only shrink the money supply, it would slow down the velocity of money to a snail's pace as deflation set in. There would be a cash famine of epic proportions.

As for this, you are preaching to the converted. I'm not questioning the preferability of fiat currency over the gold-standard, I'm just trying to understand exactly the mechanism by which modern money was created by looking at it in slow motion.

Aimless: this takes us pretty far afield from what Graeber's talking about, but I suspect that what you're saying isn't true anymore, and perhaps was less true than people ever thought. Like the bank of england didn't yet introduce a fiat currency -- it was still gold backed in some sense. It was just that the debt itself became fungible in a very immediate way. But that's just the nature of debt! (and like even when the u.s. dollar was gold backed or whatever that didn't mean that they actually held enough gold in reserves to make good on every bill printed afaik). But we can see this very immediately now with measures of the money supply. The money supply sort of works by its own rules and the current standard measures only capture a part of it -- far more is currently unmeasured in the "shadow banking system" of circulation of collateral. What I'm getting at, if it makes sense, is that money supply is an artifact of market demand, and that tends to determine both velocity and supply (writ large -- i.e. think M3 and then some). So money is a commodity like any other in a sense, but that commodity isn't determined by the actual supply of bills (or electronic equivalents) but instead that coupled with the transaction costs of "multiplying" money through leveraging up and the recirculation of loans and collateral. And to the extent that those transaction costs are now much cheaper than they were, then the "cost" of money is much less tied to anything in particular the government does (except to the extent that e.g. the Fed has lots of resources to throw around and so can move the market the same way any other player with an equiv. checkbook could).

& his history there looks right, if maybe a little simplified (for the format presumably) - foundation of Bank of England is normally taken as foundation of paper credit + national debt currency system (and it is to fund the 9 Years' War with France), but obvs causes, consequences, politics, etc look a bit messier or more complicated if you get a bit closer.

the u.s. dollar was gold backed or whatever that didn't mean that they actually held enough gold in reserves to make good on every bill printed afaik

It was just this fact which eventually drove the U.S. off the gold standard.

In the late 1960s France was choosing to redeem its dollar reserves as physical gold, which it had the right to do under the Bretton Woods agreement. It soon became abundantly clear that the gold reserves in Ft. Knox could easily be drained by such actions, if they were allowed to continue.

In fact, this was DeGaulle's intention. He wished to make it plain that the US dollar had floated far above its presumed anchor, so that it had been de facto heavily diluted against gold while still being accepted at par, thereby creating an unfair trade advantage for the USA. Needless to say, he made his point.

I guess I've approached him with curious skepticism because his ideas seem appealing but I'm ultimately doubtful about any claims of "X is the source of oppression in the world, and we should eliminate X and build an oppression-free society with no hierarchical relationships." I also don't really see what the logical conclusion of his ideas could be other than a sort of small-scale utopianism, because I doubt a modern industrial society could run without either debt finance or some more direct form of coercion.

So can anyone recommend essential books on these kinds of things (central banking, monetary policy, history of money, etc.)? I'm going through Niall Ferguson's Ascent of Money right now and I find it to be way to cursory and jump-aroundy.

Yeah I'm sort of just glossing over anything that strikes me as explicitly right-wing ideological. Parts of the book are very well told and others are incomprehensible. It's a slapdash book that would probably need to be multi-volume to be any good.

Galbraith's Money: Whence it came, where it went is very readable, but it might be too cursory as well.

in the sandbox 'what are you reading' thread I mentioned:

Casualties of Credit: The English Financial Revolution, 1620-1720. Pretty good - clear, good topic, more history of ideas than history; a bit narrow or superficial in places - the book-from-thesis air.

It might be worth looking at if you want a sense of the arguments about money and credit that were going on then. Goes into alchemy etc iirc, gives a sense of the messiness and unsettledness of the period. Not a lively read though.

I mean the good thing about reading it is that when he describes the mechanics of some bond transaction or something I can sit there for a second and read it slowly a couple of times to make sure I actually get it and am not just nodding my head. But too often the book doesn't slow down to actually describe how something worked anyway.

i liked 'capital ideas' although its not like bernstein is free of ideology or anything.

ferguson reaches some terrible conclusions but large parts of 'the cash nexus' are worthwhile as history. better than the 'history of money' although its still quite partisan and flawed as analysis. idk its like reading braudel or s.thing where the detail is incredibly worthwhile

Anthropologist Jack Weatherford's The History of Money was more interesting to me than the Ferguson (who strikes me as a overly generalist historian allergic to primary sources). Liberal economist John Kenneth Galbraith's Money: Whence It Came, Where It Went (orig 1975, but revised) is an classic. Galbraith strikes me as the sort of economist who would be welcome at coctail parties.

I can recommend William Greider's Secrets of the Temple for an in depth history of the first 70 years of the Fed. Ed Griffin's The Creature from Jekyll Island is an entertaining read from the libertarian/anti-Fed camp.

So I wound up buying Bernstein's "Primer on Money, Banking and Gold" which is useful if outdated. I feel like I finally do more-or-less "get" how banks create credit money and how the Federal Reserve exercises control over their creation of credit money.

I still find murky certain things about monetary policy, for example, if money supply is supposed to bear some relation to total productive output in the economy, why is it a good idea to increase the money supply when the economy is in recession, and how is it that that doesn't always lead to some kind of inflation, e.g. right now, where we are supposedly seeing a huge increase in the money supply and low inflation?

i'm totally thinking of this in simcity terms, but if you have population growth + technological growth, but your money supply remains the same, then you end up in a deflationary spiral. like say you have a city of 10 people with stone age tech and total money supply of $100. one year later, you have 20 people with ipod tech, but still $100, so the two guys with the $100 have no incentive to spend it, because if they wait another year, they can own 40 people and get a super ipod for the same amount of $. as sim city zeus, you should just print up extra $ and distribute it the the rest of the 98 people so your economy doesn't collapse.

maybe that's bad example -- think of it this way maybe: you and vincent van gogh are the only human beings alive and you have $100 and vincent has nothing but a painting. So the painting is worth max of $100 because that's all the money there is. Say vincent paints another painting. now the value of your dollar has shot up, because you could potentially buy two paintings instead of just one before. the aliens who control the monetary supply should really put more money into your two-person economy.

Here's my shot at how the argument goes -- I'm not endorsing it necessarily. Typically in a recession, arguably, there are opportunities that are not acted on because the carrying cost of capital is too high. I.e. if you put in x dollars into these places, you will get back more than x dollars, but less than the rate at which you can borrow those x dollars. The reason the cost of capital is too high is because everyone is afraid of lending out capital because, hey, recession, lots of things have been losing money, so better to sit on it. This is a liquidity crunch. Therefore if we lower the cost of capital then those opportunities will get acted upon and begin to cause liquidity to flow through the economy and the liquidity crunch goes away.

However, these days, things are different because we are in a liquidity trap. The cost of capital is already cheap. But there are few profitable opportunities (risk adjusted) even at this low cost of capital. We have not too little liquidity, but too much. However, that liquidity isn't rapidly circulating and "overheating" the economy. It's just sort of sitting there in private bank accounts and the like. So we don't really get inflation, since the money isn't used to bit up the prices of assets (though we have seen a few asset bubbles come and go, actually!).

Yeah that's a pretty good explanation. So then wouldn't that suggest that injecting further liquidity into the system on the capital/banking side is not going to do any good? I mean I guess that's why a lot of left-leaning economist talk about the need for more stimulus that's more on the demand side.

what i don't understand is why the govt simply doesn't print/create more money and immediately use it to pay off debt/send stimulus checks out. apparently this already does happen on a small scale when the US mint comes out with new quarters or whatever and collectors buy them instead of putting them out in circulation. i guess that's more like a hidden tax on hoarders rather than actually increasing the money supply but still.

wouldn't that suggest that injecting further liquidity into the system on the capital/banking side is not going to do any good? I mean I guess that's why a lot of left-leaning economist talk about the need for more stimulus that's more on the demand side.

Exactly. but the argument goes (at least by some -- like everything about monetary policy, different schools will disagree about basically everything) that even in a liquidity trap, where the effective interest rate "should be" below zero, while the government can't drive the rate lower, it can simply increase the amount of money sloshing about to the point where people feel obliged to direct some of it towards something or other. That's basically one way to look at quantitative easing.

The other way to look at quantitative easing is that you have a huge contraction in what people thought constituted wealth (in the form of lots of paper turning out to be worthless) so you increase the money supply directly to offset what would otherwise be a very deflationary force. You can also think of this as offsetting the diminished "velocity" of money. There are other ways to look at it too (much more negative).

And of course the U.S. could "print more money" (that's not precisely what easing is, but...) and give out more stimulus, and the reasons why it doesn't are more political than anything else. Part of which is exactly transmitted as that fear of the "inflation genie" (which of course plenty of other economists can argue very convincingly is not in any bottles at this moment because there is in fact a liquidity trap, look at Japan and what happened there, etc., etc.)

So I've had this idea of things in my head for a while, and maybe you understand the situation well enough to tell me whether it makes sense. You say

The other way to look at quantitative easing is that you have a huge contraction in what people thought constituted wealth (in the form of lots of paper turning out to be worthless) so you increase the money supply directly to offset what would otherwise be a very deflationary force. You can also think of this as offsetting the diminished "velocity" of money.

The way I've been thinking about the current economic situation is that the most recent bubble created quite a lot of fake, non-existent value that was really never there in the first place. When all that "wealth" turned out to be worthless, as you say, there is, as you say, "deflationary force." However I would think that you would WANT to deflate non-existent value. So I guess an argument for expanding the money supply is actually to create a kind of "soft-landing" effect, because if you just let all the air come out at a natural rate it would create economic chaos. In other words, in a sense we ARE inflating the economy, but only enough to counter and slow down the effects of deflationary pressure enough to prevent complete panic and a downward spiral.

For example, if mortgage rates are low as a result of monetary policy, I'm more likely to take an "inflated" house off someone else's hands, because my monthly cost is now reduced so I can own the same dollar value amount of house for less money. So maybe instead of that person's home dropping like a rock in value, the value levels off and the economic impact is sort of more spread out. I buy it with a low-rate mortgage, and maybe I don't experience much appreciation in value for a while, but the seller and the holder of the old mortgage get out of a bad situation. Growth is slowed but crisis is averted. Is this a good way of understanding the larger economic situation as well?

The Fed thought quantitative easing would drive interest rates down to negative real rates, forcing investment in riskier, job-producing investments like business loans and capital investment. In reality the major bank recipients used QE funds to turtle up, buy 10-yr Treasuries for the tiny (and negative in real terms) spread, and rebuild their balance sheets. The QE funds that found their way to proprietary trading desks were used for socially non-productive speculation in commodities, and rather little actually splashed out of the finance sector into the real world.

Financial-fraud prosecutions by the Department of Justice are at 20-year lows... (they) are just one third of what they were during the Clinton administration....

Some suggest there is... potential for conflicting interest when the department’s top officials come from lucrative law practices representing the very financial institutions that Justice is supposed to be investigating. “And that’s where they’re going back to,” says Black. “Everybody knows there is a problem with that.” (Two members of Holder’s team have already returned to Covington.)

Meanwhile, Obama’s political operation continued to ask Wall Street for campaign money. A curious pattern developed. A Newsweek examination of campaign finance records shows that, in the weeks before and after last year’s scathing Senate report, several Goldman executives and their families made large donations to Obama’s Victory Fund and related entities, some of them maxing out at the highest individual donation allowed, $35,800, even though 2011 was an electoral off-year. Some of these executives were giving to Obama for the first time.

i'm confused as to why increasing the monetary supply by giving it to the banks is less politically risky than simply using it to directly pay for things, especially since the banks did not do a great job of lending that money out.

QE didn't have "bank recipients" in any real sense. QE is just the fed buying treasuries. The only difference between QE buying of treasuries and non-QE buying of treasuries is that non-QE usually involves short-turm repurchase agreements rather than outright sales, so is targeted at the short-term cost of capital, while QE involves outright purchase of at times longer dated treasuries, and the money used to buy these treasuries strictly-speaking didn't exist before it was electronically credited to the account of the dealer whom the fed purchased the treasuries from.

But it's not as though it involves the fed giving money to specific banks in any real way. It just basically changes the ratio of treasuries/cash in the market.

hurting isn't saying that GS et al are "universal[ly] innocen[t]," he's saying that as far as he knows there may not be any legal grounds to prosecute them. i dunno if i agree -- and i'd like to see the SEC, the IRS and anyone else issue a subpoena or two before making a determination on that issue -- but he isn't saying that they're clean or innocent.

personally, i'd like to believe the "they prosecuted Al Capone for tax fraud" canard -- that is, if the Feds really wanted to nail Goldman Sachs et al they'd find something, ANYTHING and push it as far as they can -- and however much i may suspect that their inaction is b/c they really don't want to go after them, is there any real proof that that IS what is actually happening?!?

I don't really know what the Justice Department is doing apart from making up legal arguments to support the assassination/police state that no one gets to actually read. and prosecuting medical marijuana distributors, I guess.

The idea that you're going to be able to prosecute goldman sachs executives for criminal financial fraud remains one of the most annoying and time-wasting red herrings of the left

― Scott, bass player for Tenth Avenue North (Hurting 2), Thursday

Difficult but not annoying or time wasting (I'd rather have Justice working on such a criminal case even if they lose-- it's not like they're gonna be drafting other legislation to tighten up regulations on wall street or doing other more important things if they're busy on such a case). As Newsweek that well-known left-wing mag noted:

A year later, in April 2011, the Senate Permanent Subcommittee on Investigations, chaired by Democrat Carl Levin, after a two-year inquiry, issued a fat report detailing several transactions, including Goldman's Abacus deal, that Levin and his staff believed should be investigated by Justice as possible crimes. The subcommittee made a formal referral to the department (as did the federal Financial Crisis Inquiry Commission, chaired by Phil Angelides), and Levin publicly stated his view that criminal inquiry was warranted. Goldman executives, including the firm's chief executive officer, Lloyd Blankfein, started hiring defense lawyers.

The Fed is doing both. Something like 60% of Treasury issuance to pay for the continuing insane deficits (35% of Federal spending is borrowed) wound up on the Fed's balance sheet last year. It does pass through banks: the Federal Reserve is a semi-private corporation owned by member banks and chartered by a 1913 act of Congress to get around antitrust concerns.

Also, political objections (in the form of objections to Fed board nominations) have all come from the Tea Party Right of late, which is very opposed to quantitative easing as a debasement of the dollar. Kinda naive, when it did so many good things, like force China further off its peg. In the long term, QE, by debasing the dollar just transfers wealth from savers and the wealthy (ie, the 1±%) to debtors. For the 99%, its terrible if you are a pensioner but ultimately helpful if you're underwater on your mortgage.

Right, inflation is bad for savers of money and people on fixed income, good for people with debt, and kind of neutral for everyone else as long as it doesn't get out of control (all other things being equal, wages rise with inflation).

At the moment, the vast majority of prosecutable fraud from the mortgage bubble arises from "upstream" of the financial engineers at the Wall St. banks. Loan originators who falsified income documentation, appraisers who inflated appraisals to retain business, etc. A strong case can be made that only a few of the mortgage-back security aggregators really knew or care how bad the credit risks had become in the 2005-7 timeframe, so long as some fool in a Dusseldorf landesbank was willing to buy them.

William K. Black, one of the best sources on the lack of prosecution for credit-bubble fraud, IIRC notes that the majority of the white-collar crime investigators at the FBI and other Federal law enforcement agencies were reassigned to investigate money-laundering for terrorist organizations in the aftermath of 9/11. A budgetary request for more hires to replace them was nixed by Congress.

The subcommittee made a formal referral to the department (as did the federal Financial Crisis Inquiry Commission, chaired by Phil Angelides), and Levin publicly stated his view that criminal inquiry was warranted.

Anyway my gripe about that line ("why haven't these guys gone to jail?") is that actionable criminal fraud makes up a tiny portion of what went wrong with our economy, and while it is often metaphorically accurate to say "these guys are crooks", it's rarely literally provably true. Further, it seems to me that the lust for a public hanging kind of distracts from the much bigger, harder systemic problems that need addressing.

if nobody's left to run it because they're all in jail, that seems like an excellent rationale for govt seizing control. i'm not sure, but can the govt be plaintiff against banks in a civil suit? that seems like another avenue to seize assets.

Right, inflation is bad for savers of money and people on fixed income, good for people with debt, and kind of neutral for everyone else as long as it doesn't get out of control (all other things being equal, wages rise with inflation).

this is true but again, we don't really have inflation. we just have low rates, which are also good for debtors and bad for savers (but are also good for equities since it forces money [that wants returns] out of bonds and into riskier investments.). but we don't have prices increasing at a striking rate (recent episodic commodities bubble aside). and i've said this before, but i'm pretty dubious that the low rates are a result of fed policy at all, actually. There's enough demand for relatively safe assets that rates would probably be very low anyway.

Right, didn't mean to suggest we are seeing inflation, although I do think that the expanded money supply has contributed to mini-asset-bubbles. I think what it HAS maybe done is exerted enough upward pressure on prices to keep them from deflating, which is what I meant in my prior post.

That's an interesting theory about the demand for safe assets, and one I hadn't heard. But it seems like it almost has to be true that rates are lower than they would be without fed intervention. I mean the fed has spent, what, over a trillion dollars buying treasuries? And how big is the entire treasury market? 10 trillion? I can't find a clear number in my quick google search, but the additional demand added by the fed's buying would have to make a significant difference to rates, even if they'd be low anyway, I'd think.

Anyway my gripe about that line ("why haven't these guys gone to jail?") is that actionable criminal fraud makes up a tiny portion of what went wrong with our economy, and while it is often metaphorically accurate to say "these guys are crooks", it's rarely literally provably true. Further, it seems to me that the lust for a public hanging kind of distracts from the much bigger, harder systemic problems that need addressing. --Scott, bass player for Tenth Avenue North (Hurting 2)

Seriously JAIL THE BANKSTERS makes me want to throw myself off a bridge.

Ok so I know this isn't EXACTLY within the thread, but since this has kind of become the smart-people-explain-finance-related-stuff thread, can anyone explain a bit about what a Greece Euro exit would mean?

nobody really knows what a greece euro exit would mean or how it would happen at the moment, i suspect. The new 'geuro' proposal (http://www.cnbc.com/id/47505085) strikes me as not completely insane and unworkable as a medium term solution that would probably just be a step towards ultimate euro exit.

What you're hearing lately from the Powers That Be about the survivability of Greece leaving the eurozone is all about liquidity contagion. They're saying that balance sheets are arranged such that the direct financial losses are survivable. But what about fear? It's harder to assess, but anyone who's sanguine about this is either bluffing optimistically or deluded. Ground zero for fear is going to be Cyprus. Most people probably don't even know that Cyprus is an independent country at all, and if they do know anything about it what they know is that it's some kind of ethnic Greek proxy state. So if Greece is gone, so is Cyprus, which is basically part of Greece. And if one island is gone, then what about Malta? So Malta's down. Now Cyprus and Malta matter even less than Greece. But once the policy rule isn't "Greece is different" but "Greece and Malta and Cyprus are all different" then who really knows. Does anyone even know anything about Portugal? Again, not really. Except it's close to Spain! And so now Spain's melting down. Not because of losses on Greek debt, but because the Greek exit and subsequent collapse of Cyprus have us new information about the limits of the German political class' level of commitment to the eurozone and now everyone's alarmed.

The only way to halt the pattern is to provide some very clear and very salient informational point separating the countries that are exiting from the countries that aren't exiting. And that's hard to do.

Like this. Not very convincing. Whose fear are we talking about? The American public? The German public? Institutional bond investors?

as we saw in the american finical crisis the line between government and banks can become p abstract, the same thing has been going on for a while in the eurozone, germany et al is pumping a bunch of money into the greek government/banks, the distinction is p academic at this point

germany may not want to help bail greece out but thats exactly what its doing, uncertainty as to whether they will keep doing it is whats causing the fear which is resulting in the charmingly named 'bank jog' of euros flowing out of at risk nations banks to more robust ones

exposure to grek debt isnt really the issue because greece isnt really a v big economy, the issue is if the eurozone lets greece default then people start to wonder if theyll let italy and spain default too, which are obvs much larger/dangerouser economies

I guess I thought, though, that Germany's concern is that it DOESN'T especially want to be a part of the saving of those countries, i.e. Germany's fear isn't "don't let them default" it's "don't force me to help rescue them."

basically for the euro to survive imho they have to change their charter so that theres an explicit pledge to bail out to the bitter end any failing member countries, just like massachusetts bails out mississippi every year, this if you take the logic far enough would kinda require europe to become one country

better tho i think would be to somehow peacefully unwind the euro if thats at all possible, because then i could afford to travel to spain and eat paella

If it had been done properly then a single currency and stronger, linked economies could have given Europe a chance to have more power against the dollar and the gargantuan US economy that basically everyone had to be subservient to for a while.

i'm no rah rah cheerleader for capitalism but as i understand it, it is a force that desires flow and loathes national boundaries, so the notion of one large economy running through separate cultural identities etc could have been an interesting experiment for our globalised future but now i think maybe collective farming is the way to go

they do have a degree of that with the MEPs and all, it just needed more definition. given the Europeans though they might have instinctively gone back to some insane Holy Roman Empire style central power with loads of largely autonomous principalities jibing each other. if you've ever played Europa Universalis III, you'll know how messy that can get.

there could have been a way, politically, maybe, but i imagine there would be a lot of speechifying from disgruntled right-wingers, touting the horros of Bratwurst on the Champs-Elysees or Baguettes lining the Appian Way.

thats a p good piece actually but it kinda dances around how insane things would get if spain left the euro

like this is all spanish banks failing simultaneously: Financial institutions that have bought Spanish credit-card debt (or Spanish mortgages or whatever) may discover equally shockingly late that their bonds also will not and cannot pay off in full.

it's kind of overstating the case when it says "shockingly late that their bonds ..." because the surprise isn't there anymore. out of that 130 billion euro bailout, 100 billion of it is from investors writing down the greek bond debt. so when they talk about building an additional 700 billion euro firewall around europe what they're talking about is preparing to write down other big chunks of debt.

"One of the reasons that Wall Street had cooked up this new industry called structured finance was that its old-fashioned business was every day less profitable. The profits in stockbroking, along with those in the more conventional sorts of bond broking, had been squashed by internet competition."

Sort of set off a light bulb for me. Wall Street would rather have the predictable profits from its old-fashioned businesses -- the old "make other people's money work for you" adage. Profits whether the market goes up or down. Profits from transaction costs. It's when that model is put at risk that Wall Street starts thrashing around and doing crazier, more risky things. It's almost like a gambler doubling down.

When E-trade (or Scotttrade, Ameritrade, Fidelity, Schwab, etc.) advertise $9.99 for unlimited share amount transaction fees, its worth noting that Merrill Lynch et. al. in the 70s used to make around $150 for the first 100 shares traded and a sliding percentage of total dollar amount thereafter. Trading was expensive, investors had to buy and hold, and brokers went out of their way to seek new clients and sometimes even keep them happy to ensure future commissions.

Additionally, stock prices used to be quoted in 1/4th, 1/8th and sometimes 1/16th of a dollar, ensuring that the spread between bid and ask that the brokerage could pocket if they were doing a interclient trade was at least $0.06 and usually more like $0.25, per share. With decimalization of share prices, the spread on liquid securities has dropped to fractions of a penny.

The disintermediation of discount, and later, internet trading totally destroyed the business model of the brokerage industry.

The LIBOR scandal hasn't taken off here (USA) as a story, but it is getting some play. It's this kind of casual manipulation of the market that destroys trust in banks and bankers, and someone needs to point out that without a certain amount of trust to grease the wheels the whole financial system would freeze up as solid as a rock. The punishments for such abuses should be commensurate with the damage they do to the whole system.

Libor should really be getting more play in the US. There's $500trn based on it in one way or another, and a lot of public money (via states and cities) made or lost via it. Be surprised if there aren't fraud investigations and a shit-ton of lawsuits from the US over this.

my sense is that libor basically was always a big lie packaged up as an actual number, and everyone who actually interacted with it and knew how it was generated must have pretty much known that.

basically, bankers are not stupid when it comes to considering how people might attempt to break the rules to screw them over. and so when you have a rate that everyone knows is the average of people just saying whatever numbers they want to, every trader and banker must have understood that this never was something at all meaningful or reliable, or only was to the extent that it was an average of what different people wanted it to be in the first place.

just that libor never made sense, and everyone was always cynical about it and i mean yes go ahead fine the banks, they deserve it, but don't pretend that libor ever was or could be (or can be if we fine enough banks) anything but a mechanism for big banks to "vote" on short-term rates.

libor, remember, is a number that a bunch of banks got together and colluded to make up to begin with!

WASHINGTON (Reuters) - The New York Stock Exchange will pay $5 million to resolve U.S. civil charges that it gave certain customers "an improper head start" on trading information, marking the first time a U.S. exchange has faced a financial penalty from market regulators.

Ok, so since QE and monetary policy is being discussed on the Taibbi thread, and since I also just heard Galbraith Jr. on NPR talking about related issues, I have these nagging doubts/questions about the standard line that "we're not at risk of inflation."

It seems to me that the reason we're not seeing inflation is that the economic recovery is so paltry. But the point of QE and other uses of monetary policy is to jumpstart the economy, right? And also, we keep hearing about how a lot of the liquidity the government is attempting to inject is not making its way into the system because banks aren't lending enough, correct? I mean maybe this is no longer true, but I thought so. Well what happens if the economy really does start to pick up, and all that extra liquidity starts to make its way into the economy again -- then aren't we finally going to start seeing some inflation? And then isn't the Fed faced with a problematic choice of either allowing inflation or putting the brakes on the recovery?

i think a lot of the recent stuff amounts to the fed saying that it is willing to have a period of higher inflation in once the economy starts to recover. paul krugman had a blog post recently noting the increased spread between inflation-protected and regular govt bonds and bascially saying that this is a feature, not a bug, even if they prefer not to explain it that way.

One thing that is true about bubbles is that you can't reinflate them. Investors generally stay shy of whatever it was that went bust until the memory of it fades somewhat. That means that pumping banks full of reserves to loan to investors will probably result in that money flowing elsewhere than detached single-family housing.

Because this is not a housing-led recovery as is often the case in the past, it has not been a recovery led by strong gains in employment. So, there is a pretty good chance that some of those banks loans will flow toward speculation. A good candidate would be commodities, especially oil and food. That certainly does bring some risk of inflation with it, but not the hyper-inflation bugbear that the far right keeps waving around. That is also why government infrastructure projects would have been a far better vehicle for jump-starting the recovery. Such projects do employ people and also increase demand for industrial production, such as steel or concrete.

Again, it was our idiot, ideologue Congress that failed to understand basic economics, blinded by their stupid free-market fundamentalism.

I certainly get that we're not at immediate risk of hyperinflation, and the paultard myopic focus on hyperinflation is lulzy. But I am also wondering if the left mantra of "a little inflation never hurt anyone" is myopic in this scenario too. I mean maybe higher oil and food prices are not hyper-inflation, but maybe they are exerting pressure against meaningful recovery, or inflicting additional pain on the hardest hit.

It seems to me like a competent, stable government would never allow hyperinflation. But they might be faced with a sophie's choice of doing serious harm to the economy to prevent it.

Since you can't "reinflate a bubble" I also wonder if the aim of current economic policy is really not to help the economy "recover" (to a state that it can't naturally return to), but to kind of give us a slow, soft landing into a new poorer existence.

After she recommended that President Obama name former Federal Reserve chairman Paul Volcker as Treasury secretary, she wrote, Obama’s decision to tap Geithner was “a punch in the gut.” She considered Geithner the “bailouter in chief” because he wanted to make unconditional guarantees to top banks to keep them afloat without demanding much in return.

Potential Attenuating FactorsIn my judgment, the Federal Reserve's deployment of our policy tools has been completely appropriate in promoting maximum employment and price stability. Ideally, such policy decisions would be informed by precise quantitative information about the effects of each tool. In reality, however, the estimated effects of the FOMC's policy actions are subject to considerable uncertainty. Such uncertainty is intrinsic to real-world monetary policymaking at any time but is particularly relevant under circumstances where the scope for conventional monetary policy is constrained by the zero lower bound on the federal funds rate, leaving unconventional tools as the only means of providing further monetary accommodation.

Although these monetary policy tools have been successful in pushing down interest rates across the maturity spectrum, the magnitude of the transmission to economic growth and employment has been somewhat more muted than I might have expected. Indeed, it seems plausible that the effectiveness of our policy tools is being attenuated by a number of unusual persisting factors, including an excess supply of housing and impaired access to credit for many households and small businesses.

Under normal circumstances, residential construction is an interest-sensitive sector of the economy that has played an important role in contributing to previous economic recoveries--especially the brisk recovery that followed the steep downturn in 1981 and 1982. In the wake of the bursting of the housing bubble, however, the housing sector has remained exceedingly weak. In effect, there is an excess supply of housing that seems likely to decline only gradually despite the record-low level of mortgage rates. Thus, in this crucial sector, one can argue that lower interest rates have not shown through to higher activity in the same way that would be expected under more usual recoveries.

Consumer spending is also being restrained by the excess supply of housing, which has put downward pressure on home equity values and household wealth. A substantial portion of homeowners now have negative home equity and are effectively unable to refinance at historically low mortgage rates. Many more have seen a drastic decline in the value of their homes, which would typically serve as collateral for home equity lines of credit or second mortgages.

The slow progress in repairing and restructuring households' balance sheets may also be lowering the normal responsiveness of consumer spending to a decline in market interest rates. In particular, lenders continue to maintain relatively tight terms and standards on credit cards and, to a lesser extent, other consumer loans. Consequently, many households may be unable to take advantage of the lower borrowing rates that are available to those who have a high net worth and pristine credit records.

Many small businesses also appear to be facing unusual obstacles in obtaining credit. If times were more typical, we would expect a smooth transmission in which lower interest rates would fuel credit expansion that would be used to finance expanding payrolls, capital investment, inventories, and other short-term operating expenses. Nonetheless, the latest Federal Reserve Senior Loan Officer Opinion Survey on Bank Lending Practices, which was taken in July, indicated that although domestic banks continued to ease standards on their commercial and industrial loans, the net fraction reporting easing on such loans to smaller firms (those with annual sales of less than $50 billion) remained low and was well below that of loans to large and middle-sized firms.8 In its August survey, the National Federation of Independent Businesses reported a noticeable increase in the proportion of small businesses reporting that credit has become more difficult to obtain.9 These businesses not only expect credit to become tighter in coming months but--like other businesses--have turned sharply more pessimistic about the broader economic outlook.

Finally, and perhaps most comprehensively, it is worth observing that the financial crisis has undermined the wealth of many Americans. Low- and moderate-income families entered the recession with little financial buffer against the adverse effects of wage cuts, job loss, and drops in home values. According to the 2007 Survey of Consumer Finances (SCF), home equity accounted for about half of the total net worth for low- and moderate-income families, which made them extremely vulnerable to the eventual housing market collapse.10 Families at the lower end of the income distribution saw a substantial drop in their net worth between 2007 and 2009, and families in the middle of the income distribution fared even worse.11 Combined with widespread unemployment, housing and stock price declines, and increasing rates of mortgage defaults, foreclosures, and bankruptcies, the assets of many American families have been significantly eroded. The effect of these developments may be to attenuate the revival of normal consumption patterns that would otherwise be dictating increases in consumer demand and growth.

What bothers me about that analysis, is the fallback on "if these were normal circumstances" as an excuse -- assuming that there's an economic "normal" seems like a big mistake in the thinking. I mean "it is worth observing" that the financial crisis destroyed all that home equity wealth, well yeah duh shit that's the whole point isn't it? I mean there's just something very frustrating in the thinking here -- "We are using measures to solve the financial crisis which, under normal circumstances, would solve the financial crisis, but due to the financial crisis..."

I mean I guess one third option would be stimulus that targets the demand side rather than monetary stimulus, sure. And what worries me is not that QE "doesn't work" in the sense that it has no impact on job creation, but that it will have negative impacts that are disproportionate to the resulting job creation. Because it seems to take an awful lot of monetary stimulus to get a little tiny bump in job creation/consumer spending.

that fiscal policy is better really doesn't matter thanks to democracy, that it happens to be in the set of theoretical policy decisions doesn't mean that it's also in the set of actual policy decisions

That said, I would be interested in hearing a more detailed comparison of the counterfactuals of more QE vs no more QE right now. The case for the stimulus is easy -- the financial system not completely collapsing is clearly a preferable outcome.

Things would likely be a good deal worse. I doubt any plausible intervention (monetary or fiscal) would dramatically change things for the better, as its the debt overhang that is preventing private investment:

As for non-plausible ones, sure Bernanke could really throw currency out of helicopters, but the line the Fed is walking is to ensure that the U.S. dollar, for all its looming problems, is still the leper with the most fingers (vs €, ¥, etc).

I'll add though, that I'm not at all sure the Federal Reserve has figured out how to return to "normal". The Federal Reserve has in effect financed every home purchase over the past 4 years (and some prior) by buying the hell out of mortgage backed securities. The MBS spread with the 10 yr. treasury dropped to 5 basis points (0.05%) (!!!, >8o) last week.

Just as that cash injection was stimulatory (well, in the sense that adrenalin to the heart of a OD patient is), its withdrawal, someday over the horizon, is going to be rather messy. Maybe the most likely scenario is that the Fed just holds everything to maturity so that return to normalcy (in the MBS markets) is a 10-15 year affair.

It certainly doesn't give banks any incentive to hold on any newly created MBS. Chris Whalen (who's a pretty bright bank analyst, lotsa podcasts out there) has long argued that the artificially low interest rates (no profit if loan is kept, banks aren't being compensated for potential defaults) has actually prevented private financing. The now government owned Fanny Mae/Freddy Mac are pretty much the only game in town buying mortgages.

I think that right now the Fed is still more worried about deflation than inflation, and rightly so. Inflation has been rather subdued of late, despite high-profile volatile prices like food and oil picking up. Although inflation is scarier to the average person, deflation is apparently just as bad and harder to get out of - witness Japan's ongoing woes, some 20 years after their housing bubble burst. I think that the Fed is confident that if inflation starts to get out of control they have the tools to bring it in line, and they want to give themselves some margin of safety by keeping inflation in their preferred range in case another shoe drops in Europe or China. Also, they want to support the housing market as best they can by keeping mortgage rates low. Whether this will lead to robust growth is debatable, but at least they hope to prevent Japan-style deflation.

Kweku Adoboli repeatedly broken down in tears on Friday as the former UBS "rogue trader" defended himself against charges that he gambled away £1.5bn of his Swiss bank's money.

Adoboli, 32, burst into tears several times as he told the court in his first day of testimony that he was so wedded to his job that he put in 16-hour days, sometimes slept under his desk, and skipped his grandmother's funeral because he couldn't bear to drag himself away from his trading platform as he battled to reverse multimillion-pound losses.

"UBS was my family and every single thing I did, every single bit of effort I put into that organisation, was for the benefit of the bank. That is everything I lived for," he said as he dabbed his eyes with a paper handkerchief in the witness box of court three at Southwark crown court. "To find yourself in Wandsworth prison for nine months because all you did was worked so hard for this bank."

Curious whether Hurting 2 watched the Frontline episode? I got the impression from some of his posts that Hurting 2 thinks its was nearly impossible to bring criminal charges against the Wall Street folks; so I wonder what he thinks of Lanny Breuer, based on that show?

excerpt:Ms. White is expected to receive broader support on Capitol Hill. Senator Charles E. Schumer, a New York Democrat, declared that Ms. White was a “tough-as-nails prosecutor” who “will not shy away from enforcing the laws to ensure that markets operate fairly.”

But she could face questions about her command of arcane financial minutiae. She was a director of the Nasdaq stock market, but has otherwise built her career on the law-and-order side of the securities industry.

People close to the S.E.C. note, however, that her husband, John W. White, is a veteran of the agency. From 2006 through 2008, he was head of the S.E.C.’s division of corporation finance, which oversees public companies’ disclosures and reporting.

Some Democrats also might question her path through the revolving door, in and out of government. While seen as a strong enforcer as a United States attorney, she went on in private practice to defend some of Wall Street’s biggest names, including Kenneth D. Lewis, a former head of Bank of America. She also represented JPMorgan Chase and the board of Morgan Stanley. Last year, the N.F.L. hired her to investigate allegations that the New Orleans Saints carried out a bounty system for hurting opponents.

Consumer advocates generally praised her appointment on Thursday. “Mary Jo White was a tough, smart, no-nonsense, broadly experienced and highly accomplished prosecutor,” said Dennis Kelleher, head of Better Markets, the nonprofit advocacy group. “She knew who the bad guys were, went after them and put them in prison when they broke the law.”

The appointment comes after the departure of Ms. Schapiro, who announced she would step down from the S.E.C. in late 2012. In a four-year tenure, she overhauled the agency after it was blamed for missing the warning signs of the crisis.

Curious whether Hurting 2 watched the Frontline episode? I got the impression from some of his posts that Hurting 2 thinks its was nearly impossible to bring criminal charges against the Wall Street folks; so I wonder what he thinks of Lanny Breuer, based on that show?

On March 16, 2007, Morgan Stanley employees working on one of the toxic assets that helped blow up the world economy discussed what to name it. Among the team members’ suggestions: “Subprime Meltdown,” “Hitman,” “Nuclear Holocaust” and “Mike Tyson’s Punchout,” as well a simple yet direct reference to a bag of excrement.

The revolving door may also prevent anything from happening. Not that Treasury could prevent Justice from doing something but it doesn't help:

Lew did not appear to have any role during the negotiations over Citigroup’s bailout. When asked whether they crossed his path at any point in 2008, Henry M. Paulson Jr., former Treasury secretary; Sheila C. Bair, former FDIC chairman; and Robert K. Steel, former undersecretary for domestic finance at the Treasury, all said they had not.

By early 2009, Lew’s brief experience with Wall Street was over. He left Citigroup to become a deputy secretary of state and joined the Obama administration, where he has worked ever since.

“It’s striking the way in which the Obama administration has been staffed by Citigroup expatriates,” said Simon Johnson, a professor at MIT and frequent critic of big banks.

Well Mary Jo White also did defense side for Wall Street at one point. I'm not necessarily concerned about that though -- where I work (plaintiffs' side, a lot of cases against banks), we have several ex-defense people and I see no evidence that they're compromised by it. Maybe working for a law firm that defends a company is different than actually working for the company in terms of loyalties.

While seen as a strong enforcer as a United States attorney, she went on in private practice to defend some of Wall Street’s biggest names, including Kenneth D. Lewis, a former head of Bank of America. She also represented JPMorgan Chase and the board of Morgan Stanley.

I'm not as trusting as you that she will suddenly be fair and tough re people she used to be paid to defend

Citi’s alternate investment group lay at the epicenter of the financial crisis. Under Lew’s tenure, it lost $509 million in the first quarter of 2008 alone. More than 50,000 employees, or one-seventh of Citigroup’s global workforce, were laid off in November, and the stock price dropped about 75 percent. Despite these horrendous losses, Lew was paid $1.1 million in 2008 for less than a year’s work, according to financial disclosure statements. Citigroup’s risky hedge fund activities resulted in huge losses, requiring massive “too big to fail” bailouts from the federal government. Shortly after he left Citigroup but before he began work at state, Lew received a one million dollar bonus.

from a conservative blogpost on Forbes but the facts in this paragraph look accurate

Patricia Geoghegan, the Treasury’s acting special master for TARP executive compensation, said she disagreed with the special inspector general’s findings.

The Treasury “has limited excessive compensation while at the same time keeping compensation at levels that enable” the three companies to remain competitive and repay their bailout money, Geoghegan said in a Jan. 25 letter to Romero.

my larger belief is that the pursuit of "justice" in this situation will be of little benefit to anyone. Justice works well for the single bad apple, the insider trader, etc. "Justice" isn't really equipped to deal with entire corrupted banking systems. "Why hasn't anyone gone to jail?" makes a nice refrain to stir up outrage, but what's needed is radical changes to finance itself, because it's the system that's the problem, not just some bad players.

old documentary I watched last weekend about the May 2010 Flash Crash; the automated trading algorithms which entered a feedback loop & dropped the market 10% / nearly one trillion dollars in five minutes, before spontaneously recovering.

first five and last five minutes are the essential sections if you're pressed for time but I found the whole thing interesting.

I have very mixed feelings about going after the ratings agencies. On one hand, it's probably true. On the other hand, focusing on them gives nice cover to all the banks and institutions who "relied" on the ratings (even though they presumably knew, in many cases, that they were complete bullshit).

Also, I kind of thing you have to start at the weakest point if you want to chip away at the wall of silence. Right now no one's pointing fingers at anyone, but if the rating agencies start to really feel the heat, maybe they'll start to incriminate the banks that mislead them.

Ironically, in some cases, the banks that put the deals together also ended up suffering a large share of the losses because they held onto the AAA tranches, which were supposedly the safest. So it's not just banks trying to defraud investors - in some cases the banks defrauded themselves, due to conflicting incentives for individuals structuring deals (to maximize fees) vs. those tasked with managing risk.

If the SEC / FBI had enough white-collar crime enforcement personnel (most were reassigned to counter terrorism duties tracing Al Qaeda funding in '01-'02), my understanding is they still wouldn't have found much criminal activity at the investment banks and rating agencies. The prosecutable fraud was largely, mostly at the grass roots, with fraudulent loan applications, or kickbacks for favorable real estate appraisals. There's no law against security securitization, there's no law against using then novel risk pricing formulas. Investment bank sales forces have been pushing unwanted securities on their less favored and less knowledgeable customers for as long as there have been investment banks. That may be ethically repugnant, but its not illegal. The buyers of the ultimately trash AAA tranches of MBS deals were were degreed professionals who should have known better. Look at the prospectus for any of these OTC structured finance deals, they're mostly legal boilerplate that screams caveat emptor. And as o. nate comments, many of the bankers were drinking the kool-aid right to the end.

RG: This lady happened to call in, and I’m not exaggerating, she – I think she must have probably set up a reminder in her – like I do – in my Outlook and it pops up every two weeks or 10 days or whatever it was, and she would call in religiously, even though they would tell her, “You know, it’s going to take 30 days, you don’t have to call back” – she would still call back, and kept calling back. And there would be notes that she’d call back and hear, “It’s still in the review, it’s still in review, it’s in underwriting for review,” you know, all this stuff. And then finally it comes to this – it came to, I think it was December 17th, if I remember right. She had called in and she’s asking what’s the status of her modification, and they go, and the person says, “Ma’am, you can’t get a modification, it’s an REO property.” [Real Estate Owned, which means the bank has already foreclosed on it]

YS: What?!

RG: That’s exactly. She’s like, “What is an REO property?” Now I had read these all in chronological order. I started at the bottom, read them straight up, and I did the exact same thing you just did. I’m like, “What?! Where did I miss this?” She’s calling in, and now, keep in mind, she also had, she’s making these trial payments by auto debit. Auto debit. They had been debiting her account for all these payments and the girl says, “Ma’am, your property went to foreclosure sale in September.” Now they had taken her September, October, November and December payment. And yet they foreclosed.

YS: Oh my God. How could they have done a foreclosure when she’s still living there? How c– she wasn’t evicted?

RG: I know…And she ended up, January, like January 7th I think it was, because this was December 17th – holidays – she ended up filing bankruptcy to keep from being evicted. So he comes to me and goes, “It’s okay, because there’s no harm done to her, because ultimately she got her modification.”

I said, “Well, wait a minute. The C reviewer missed this. It went to QC [quality control]. QC missed it. Promontory reviews it and their notation is, “Borrower is currently in a modification.” Well, because when they reversed it, rescinded it, they put her in a permanent mod then. So by the time Promontory reads it, they’re seeing – all they looked at was that she was in a permanent mod at the time. Not that she had gone through all this prior to that. And I said, “How can you say there’s no harm?”

There are a great many institutions which cannot legally invest in any bonds other than those rated AAA by one of the ratings agencies. These would include many governmental and quasi-govermental institutions. Those institutions should all be suing the ratings agencies for heavy losses they incurred on misrated bonds, based on the many damning internal emails from the ratings agecies that have been made public since 2008.

That might sound snarky, but I am trying to understand the difference between the various points of views on the subject and if there is anything in addition to breaking up the banks that can or should have been done.

And yes I know that Glass-Stegall was not specifically relevant in the recent problems but I nevertheless found it interesting that Jack Lew in his testimony re being the next Treasury Secretary would not support bringing it back.

His defense of his Citigroup bonus and Cayman islands tax shelter investment was pretty weak I thought.

There are a great many institutions which cannot legally invest in any bonds other than those rated AAA by one of the ratings agencies. These would include many governmental and quasi-govermental institutions. Those institutions should all be suing the ratings agencies for heavy losses they incurred on misrated bonds

gotta say, just because they could invest in some janky tranched junk doesn't mean that they shouldn't have known better. basically if you say "i invested in this on the basis of its rating" then you're saying "i do no independent research or thinking".

that's true in theory, s.clover. but a lot of governmental/quasi-governmental types who make investment decisions and policies on behalf of their agencies are no match for the Wall Street types who cooked up these investments. it's not unreasonable for those people to rely heavily on the rating agencies -- or at least it was before the meltdown exposed the agencies' conflicts of interest and rank incompetence.

i think people way "complexity" with regards to these products about a little loosely. the formulas are sort of complex and react differently depending on different inputs. but there are models that are basically available to everyone who can afford them, and you can toss scenarios into these models and watch the valuation change even if you can't work through all the formulas carefully yourself. the basis of the ratings was basically one set of projections for average future behavior as far as property values, interest rates, default rates. but any institutional investor would have been able to run the model for themselves (otherwise there's no _way_ they should have been touching this stuff), and they could have decided that the assumptions used by the ratings agencies (that past behavior was a good predictor of future behavior) were dumb, and that there was more risk involved. Lots of people did make such decisions, and they either didn't invest in or shorted these bonds.

also basically everyone knows that price reflects perceived market risk. so if a certain class of stuff has the same rating but is way cheaper than other stuff, then the only possible reason for this is that lots of people think it is actually riskier. you basically can't _not_ know this. so in my mind you can't run off chasing risky yield, not carefully examine the consequences, then scream how you were duped when this turns out to be a terrible idea.

lots of good points, clover. only caveat would be is that i wonder how many government agencies -- or whomever was making their investment decisions -- have access to the models to which you refer. i honestly dunno -- they may be as common as mud for all i know, or super-proprietary/expensive (and out of reach of some podunk county in North Dakota).

By the same token, everyone 'knew' that bond ratings reflected the sober judgment of risk by experts whose expertise was implicitly endorsed by the government, because the government used those same ratings as a proxy for assessing a bond's safety. otoh, even investors who perceived themselves as sophisticated were unlikely to look at two AAA bonds paying different interest rates and think, "the market is telling me to take the lower interest rate bond, because this other AAA bond is really a piece of junk". The AAA endorsement by a ratings agency tended to completely obscure this risk signal.

That's ridiculous. If I tell you "this apple is 2$ and this other one is 70 cents, buy one" you'll ask "wait, why is this one less than half the cost of the other?" And if I say "this apple rating agency I paid to rate the apple said that they're both good" then you probably wouldn't accept that as the full story.

If you are an investment advisor and say "I advise everything rated AAA uniformly" then I mean, wtf, obviously you shouldn't have a job.

The idea that price is always the most accurate reflection of value and can be implicitly trusted, but a presumed expert opinion should always be heavily discounted and mistrusted, just doesn't jibe with the reality I know. This doesn't even hold true with apples, let alone extremely complex financial instruments with very little history in the marketplace. At least with an apple, you can taste it.

oh, price isn't trustworthy. But it tells you what the market thinks! The relationship between perceived risk and returns is like the first thing they teach to any trader or investment manager. similarly, any trader of investment manager should know that the information provided to them by people who want to sell them things has a certain innate bias, and that ratings vary by the class of product they're rating. none of this is obscure.

last week’s details of the undisclosed settlement between the New York Fed and Bank of America are remarkable. Not only do the filings show the New York Fed helping to thwart another institution’s fraud case against the bank, they also reveal that the New York Fed agreed to give away what may be billions of dollars in potential legal claims.

this much we can agree on, i think: a lot of stuff that went on pre-2007 that we see as face-palm obvious (such as "if bond A is as safe as bond B, then why is bond A more expensive than bond B? perhaps we need to do some more research before plunking our municipal pension money in bond A") went on as "normal course of business."

also, i don't underestimate sheer human laziness, even amongst professional investors and others w/ fiduciary obligations. how all of that will look to a court or administrative tribunal is another messy kettle of fish.

yeah, i totally agree on all this. its just hard to make an argument for a lawsuit based on the idea that you're incompetent. especially when with these sorts of products you typically have to sign off on some form claiming that you're a "sophisticated institutional investor capable of assessing risk" or etc.

This is a really interesting debate, and I think all of you guys are making really smart points.

My takeaway about the ratings agencies is that they're not really experts at all, more like a third party marketing agency -- AAA rating = the Better Homes and Gardens Seal of Approval for bonds. Or at least, once they got asked to rate more complicated securities than your standard corporate and government bonds, that's what they became.

One other thing I'd point out, although this doesn't resolve the price/risk/rating issue, is that a lot of these securities were too complex and individual to have an active enough market to price them properly. AAA may have been even more important for securities that didn't really trade.

Also, it's easy to say this with hindsight, but there are a wide variety of levels of financial "sophistication," and a quant guy at Goldman Sachs is on quite a different plane from someone managing a pension fund for the tallahassee fla police dept.

there is indeed something odd, to the untrained eye, about the revelation that likely next Treasury secretary Jack Lew had a contractual agreement with Citigroup, where he worked from 2006 to 2008, that guaranteed he would get to keep his bonus payment in the event that he left the bank to take "a full-time high level position with the United States government or regulatory body."

Various people have taken this odd contractual clause as evidence of a vast Citigroup conspiracy, whereby the bank rewards its employees for zooming through the revolving door to Washington, where presumably they will continue to do Citigroup's bidding in a shadowy, unofficial capacity.

Now, perhaps I'm being too charitable here, but I don't read much between the lines of Lew's Citigroup contract, other than that he's a fairly skilled negotiator who was able to get himself a beneficial clause in his contract.

First, it's useful to clarify: Jack Lew didn't get a "bonus" for leaving Citigroup to go to the public sector. There was no extra money involved. Instead, by taking a high-ranking government job, Lew simply got to keep the bonus money he had already been paid.

I came up with a probably simplistic but not ridiculously far-off scheme for how to get rich in hedge funds

1) Get a degree from some "prestigioius" institution like Harvard, MIT, Stanford, etc.2) Come up with a sexy-sounding strategy -- if you're a math guy it could be a "quant" thing, but it could also be just one of those "common sense" strategies3) Use contacts from your elite school to get some assets under management4) HF managers get 2% of assets plus 20% of profits per year, so with 5 million in assets (not that much in hedge fund terms) and even low returns you're already breaking six figures5) If you're at all successful by sheer luck, you'll get more assets under management and make a killing6) If you fail, no loss. Come up with a new one and repeat the steps 2-5.

Occupy The SEC, one of Occupy Wall Street’s offshoots, has filed a lawsuit in hopes of forcing regulators to (finally) finalize the Volker Rule – a provision within the Dodd-Frank Act of 2010. Three years later many of the rules that Congress punted to regulators in the law have not even been made let alone enforced.

...

This is not the first action by Occupy The SEC which seems to fall into the more liberal technocratic wing of Occupy Wall Street. The group offered a 400 page comment letter during the comment period of the rule making process.

Occupy The SEC, one of Occupy Wall Street’s offshoots, has filed a lawsuit in hopes of forcing regulators to (finally) finalize the Volker Rule – a provision within the Dodd-Frank Act of 2010. Three years later many of the rules that Congress punted to regulators in the law have not even been made let alone enforced.

...

This is not the first action by Occupy The SEC which seems to fall into the more liberal technocratic wing of Occupy Wall Street. The group offered a 400 page comment letter during the comment period of the rule making process.

Neither would any democrat-appointed judge, at least based on my quick research. There's just no basis that I know of for a lawsuit by private citizens forcing a rulemaking body to adopt rules. The statutes that they cite don't really apply.

So Scalia's lawyer son Eugene wages war against Dodd Frank and the Commodities Futures T C and other regulatory bodies, and then later we will get to see more Hurting 2 posts that based on both longstanding financial rules as well as recent changes, there is nothing that can be done about egregious Wall Street behavior!

My main beef is not with longtime rules of standing that do allow corporations (with support from their lobbyists and lawyers) to prove harm and have standing, but with the regulatory agencies and the Justice Department and the Courts that give in to theories and ideas from the likes of Eugene Scalia as well as from neo-Dems like Robert Rubin

Those who want a get-tough approach with the financial industry will focus on her years as a top federal prosecutor in Manhattan, from 1993 to 2002. Those who want a Wall Street ally at the S.E.C. will focus on her work in the past 10 years as a corporate attorney, representing big banks and other major corporations.The public deserves more from the hearing than a foregone conclusion. Senators should press Ms. White to give specifics on how she would handle potential conflicts as well as her approach to the job

If she recuses herself from any matter concerning her former clients, what is left? As a defense attorney for the big banks, she knows where the bodies are buried. Is she able and willing to use that information? Her husband has been lobbying against the Dodd Frank regulations. Is she willing to spurn his arguments? Or is her nomination a most perverse expression of the "regulatory capture" that has rendered the SEC and other financial regulatory agencies toothless?

This should be of particular concern now that Attorney General Holder has publicly admitted that the Department of Justice considers big banks too big to jail. White, no doubt, has helped to construct that pernicious argument as a defense attorney over the last years. Is she willing to repudiate that posture in her new role?

The hearing was a letdown for anyone expecting fireworks. Not a single senator voiced even slight opposition to President Obama’s pick to head the Securities and Exchange Commission, despite previous concerns by some about her ability to effectively police Wall Street.

I'm wondering if Hurting 2 will weigh in that no matter who is in charge of the SEC, because of the way existing laws and regulations are established, no one can ever do anything about Wall Street (other than dream about a fantasy Congress breaking up the big banks,giving Dodd-Franks teeth, and taxing certain transactions on Wall Street)

The unexplained mystery is why Obama keeps going back to Wall Street for appointees to important regulatory positions when there are thousands of qualified people elsewhere who understand how Wall Street works and would be fearless in holding it accountable for its bad behavior.

(William D. Cohan, the author of "Money and Power: How Goldman Sachs Came to Rule the World," is a Bloomberg View columnist. He was formerly an investment banker at Lazard Freres, Merrill Lynch and JPMorgan Chase. Contact the writer at wdco✧✧✧@ya✧✧✧.c✧✧,)

Anyway, I'm genuinely curious to know who he means. Attorneys who understand wall street are usually attorneys who worked for the big firms that work for wall street. The exception might be plaintiffs' side securities lawyers, which could make for an interesting pool of candidates actually - they might have more of an aggressive attitude.

The inability of judges, plaintiff's attorneys and (lol) consumers to understand bank processes and procedures has become sort of darkly hilarious to me. Which brings forward the essential problem which is referred to elsewhere in this thread: the only people who sufficiently understand the industry to regulate it are insiders. The paradox of course is that more regulation intensifies this problem, as it creates both more consolidation within the industry (as only the largest players can afford the compliance measures demanded by institutions like the Consumer Financial Protection Bureau) and more internal complexity. Eventually a financial's institutions operations and risk management procedures become so byzantine that only a select group of specialists can possibly understand them.

a financial's institutions operations and risk management procedures become so byzantine that only a select group of specialists can possibly understand them.

I doubt this has happened to thrifts, so there is a viable alternative for putting one's money back into the financial stream without much exposure to credit default swaps or weird hedging strategies. It pays shit for interest, but punishing savers and forcing money into high risk positions has been Fed policy for decades now, so low risk, but modest, returns are no longer an option.

“What we’re doing is a parallel development to the kind of computing we’ve had for the past 70 years,” said Vern Brownell, D-Wave’s chief executive.

Mr. Brownell, who joined D-Wave in 2009, was until 2000 the chief technical officer at Goldman Sachs. “In those days, we had 50,000 servers just doing simulations” to figure out trading strategies, he said. “I’m sure there is a lot more than that now, but we’ll be able to do that with one machine, for far less money.”

gonna be some quantum hypertrading going on up in this business eventually

"I doubt this has happened to thrifts, so there is a viable alternative for putting one's money back into the financial stream without much exposure to credit default swaps or weird hedging strategies."

the big bets the banks took weren't with small saver funds, which are insured anyway. and most of the banks doing it weren't consumer banks but investment banks anyway (which got consumer bank status _after_ the crisis as part of the bailout).

people don't have checking/savings accounts with goldman and jpmorgan typically (and e.g. didn't with lehman).

citi and bank of america and etc. act terribly in different ways (more tied in the recent period to crappy loan origination schemes etc.)

If the Treasury Department or White House do not weigh in strongly and soon against House efforts to undermine Dodd-Frank derivative provisions, the limited gains in Dodd-Frank may begin to recede. If Wall Street proponents succeed in passing this wave of Dodd-Frank “fix it” bills, more will follow. Wall Street reform is a legacy issue for the president. Does he really want a derivative deregulation bill to reach his desk in the coming months?

“There’s no reason quantum computing shouldn’t be possible, but people talked about heavier-than-air flight for a long time before the Wright brothers solved the problem,” said Scott Aaronson, a professor of computer science at the Massachusetts Institute of Technology. D-Wave, he said, “has said things in the past that were just ridiculous, things that give you very little confidence.”

Reality Check continues Public Citizen’s long history of important and in-depth research by documenting how decades of deregulation led directly to the Great Recession, from which the U.S. and global economies have yet to recover.

The book’s author, Taylor Lincoln — research director in Public Citizen’s Congress Watch group — will lead a discussion with several prominent officials who sought to stem the risks that resulted in the financial crisis, helped clean up the mess afterwards, and championed legislation intended to prevent another meltdown:

Neil Barofsky, former special inspector general of the TARP program and author of the New York Times best-seller Bailout. Brooksley Born, the former chairperson of the Commodity Futures Trading Commission whose warnings about the threats posed by unregulated derivatives trading went unheeded. Former U.S. Rep. Brad Miller (D-N.C.), who championed the creation of the Consumer Financial Protection Bureau. The discussion is free to Public Citizen members and activists.

More criticism of the White House re Wall Street, and yes Hurting 2 it does not acknowledge how hard it is to be tough on Wall Street given the existing laws in this country. But I still agree with it.

it seems wrong to me, because it doesnt' account for the fact that "co-op scrips" have a fixed purchasing power (one hour of babysitting), while currency does not (and this is true with or without a fixed money supply, though in different ways/degrees). I would think that if you just allowed the value of the "scrips" to float, you would get people agreeing to babysit for less than the full hour value in times when scrips were scarce, and that would induce some scrips back into circulation. If I'm wrong can someone explain?

I would think that if you just allowed the value of the "scrips" to float, you would get people agreeing to babysit for less than the full hour value in times when scrips were scarce, and that would induce some scrips back into circulation. If I'm wrong can someone explain?

I don't think you're wrong. I think this is in fact what often happens in recessions driven by tight money, ie. deflation. It's just that it takes a long time and is usually accompanied by unemployment and economic stagnation, but eventually a kind of equilibrium would be regained.

The swift confirmation — which was done by unanimous consent on the first day of the Senate following a two-week recess — came as no surprise; White sailed through the Senate Banking Committee on a 21-1 vote last month.

Ohio Dem Sherrod Brown was the 1 vote against her in the committee vote.

I'm sure she will aggressively do the opposite of what her hubby has been lobbying for. Well, probably not.

On Thursday, several bills to pre-empt the regulation of derivatives will be the focus of a hearing in the House Financial Services Committee. The bills, which have already passed the Agriculture Committee, must be stopped if the world is to be made safe from reckless risk-taking by banks.

Mr. Ceresney will inherit a unit that is on pace to file the lowest number of enforcement cases in a decade, according to S.E.C. figures provided to The New York Times.

Still, Mr. Ceresney faces his share of challenges. His appointment, which does not require Senate approval, could renew concerns about a revolving door that shuttles S.E.C. lawyers from the government to the private sector, and back again.

While at Debevoise, Mr. Ceresney represented a number of the nation’s largest banks, including JPMorgan Chase during an inquiry involving its foreclosure practices. Mr. Ceresney is expected to recuse himself from cases involving his former clients.

The S.E.C.’s caseload presents another test for Mr. Ceresney. In addition to the dwindling number of actions, the S.E.C. is unlikely to catch any breaks from the courts. The Supreme Court recently rejected the agency’s argument that it should have additional time before the statute of limitations in fraud cases expires.

The agency has run into resistance in the lower courts as well. Judge Jed S. Rakoff of the Federal District Court, for example, has said the agency’s settlement with Citigroup “is neither fair, nor reasonable, nor adequate” in part because it did not include any admission of wrongdoing.

The vast majority of people (including most rich people) essentially live check to check, trapped in some form of mentality where they don't adequately save in the event that financial disaster occurs. And fuckit, you only live once, amirite?

Hard to feel sorry for bankers because hey, aren't they supposed to know better than to leverage themselves silly?

Well, context is everything right? I do not mean to discount the advantageous issue of net worth or liquidity issues; clearly the rich can likely make lifestyle downgrades and, you know, still survive. That's what we hate about them, right? That they have that "choice"?

But the rich (not sure of the definition or parameters as it relates here) are typically highly leveraged by their lifestyle in at least their mortgage but almost certainly with other household debt that would be very difficult to service if a bad financial event happened. Certain elements of the tax code favor this kind of behavior, obv.

There's also the fact that if you are rich, you were probably born rich, and have rich parents, rich friends, rich extended family, etc. While the safety net is being pulled out from under the poor, this particularly safety net is pretty much built into being rich and will never go away.

size of debt in dollars is not really a useful measure without comparison to income and assets.

That aside, there's an awfully large amount of secured debt from "other" residential property (if I'm reading that right) which I guess means either second homes or rental property for income. Worst thing that happens if they can no longer service that debt is they lose a vacation home or a rental property.

xp and that info is conveniently provided on p. 72, where we get lots of great information about debt burden to income ratios. People in the 90th percentile and above have about half the ratio of every other decile group. In addition, the percentages of people in the top decile with debt payments making up more than 40 percent of their income, and people in that group who are past due on debt, are tiny compared to the other groups.

right, as I noted above there is usually an advantage to net worth (and as Adam elaborated on) but that doesn't mean that rich people aren't leveraging themselves like crazy. It just means that for whatever percent of the top (3% ? I dunno, you name it) there is likely a significant safety net that they can likely mitigate most unplanned, negative financial situations.

But that leaves millions of others with a relatively high net worth who are certainly leveraged by their homes and other secured debts. You know that. Not sure why you're trying to fight me over how leveraged most rich people are.

kind of depends what you think is rich--top 10% is $148k of annual income on up and it would seem reasonable that above 5% ($208k on up) probably has an effect on the leveraging. And the halving point starts at $107k hh per year. Maybe it would be better if I defined rich better.

Honestly, I found it odd that aggregate debt was within a few percentage points for all 70% of the country. And, that, it was only around 20%. So in that metric, I'm totally fucking wrong. Like, wayyyyyy wrong. Like always, right?

didn't type that well; what I meant was that the amount of leverage between the top 10% and 5% is probably significant. I am curious to where it really starts dropping because that to me would be an indication of where the truly "financially independent" households like. Sorry I have been terribly sloppy today and wasting so much bandwidth.

I really thought that aggregate debt for most households would be in the 30%+ range. Can't get my head wrapped around that.

I think what's really striking is that there's a huge dropoff in leverage from the 80-90 group to the 90-100 group, whereas 70-80 is pretty similar to 80-90. But I guess that makes sense if the 70-80 is x income to y income, the 80-90 is y income to z income, but the 90-100 is z income to infinity.

Does it say whether those ratios are median ratios, within the decile? Is the ratio listed exactly the 95th percentile mark?

well, the point was more if we pull the super rich out of the equation (as affable outliers!) then are the rich still leveraged like the rest of us (by percentage of aggregate debt!)? Honestly, with debt levels around 20% for even 70% of households, my argument about people being leveraged seems HORRIBLE. I need to find a new metric. Or invent one.

I didn't read the details of the breakdown that well. I think it's possible to download the whole table of data and then maybe we could (likely?) slice and dice by whatever we wanted and create our own income stratas.

I thought I'd read before that typical HH debt target (for mortgage purposes and including mortgage) was somewhere around 36%. Was very surprised to see aggregate debt levels below that.

Keep in mind that those debt levels are heavily skewed by renters. Mortgages are going to be by far the biggest ticket debt item for a family, and a family that doesn't have a mortgage is going to have a much tinier debt burden than an equal income family with none. That's why you see relatively even debt-service-to-income ratios, yet the percentages of lower income families with greater than 40% of their income going to service debt are MUCH higher.

yes, I was thinking I could go get a table of home ownership and then manually factor that in but it became too much of a hassle. And really this discussion point was supposed to be essentially about cash flow...so rents are related if I'd not have strayed over into debt.

But still, I would probably assume that at least the middle income strata had a high degree of home ownership, and that those home owners likely were near the limits of their loaning ability, and that therefore the 20% was low.

not to derail or be too lol obvious, but the kickoff to this conversation seems rather liberally sourced from this chestnut

the orig. article seems a bit dry f/ satire, though even the lonely-at-the-top sentimental horseshit w/ Oliver James waxing on the simple (and apparently inexpensive) joys of one's student years is ripped straight from the novel. (OTOH "Sarah Butcher" seemed f/ at least a few minutes to have effectively pitched the noxious notion of the upper strata as just another besieged bourgeois outpost affected terribly by the financial shenanigans of ~mysterious others~).

3. Don’t accuse your wife or girlfriend of being a hypocrite One equity researcher who said he hasn’t had a bonus for five years, advised bankers to resist the temptation to criticize wives’ reactions to the size of their bonus

“My own experience is that a lot of wives and girlfriends of investment bankers don’t necessarily like the fact that their partner is in banking – they’d rather be with someone who’s doing something much more worthy. Spouses pretend that they don’t like the money and the long hours, but the fact is that they also love the expensive holidays and meals out.

“Banking partners are therefore a bit hypocritical. It’s tempting to point this out when a bonus doesn’t come through. I’ve never actually said that to my girlfriend though as it would just cause an argument,” he added.

Don't care about a Forbes blog, or the W, Post editorial re a Forbes blog, here's the USA Today(!):

The president's proposed budget would cap IRAs and other retirement plans at $3 million, but it could fall below that in future years.

It's not easy to get more than $3 million in a retirement account, which includes IRAs, 401(k) and 403(b) plans. Currently, the cap would affect just 0.03% of retirement accounts, says the Employee Benefit Research Institute.

But despite the above:

Capping IRA could deter savings without helping reduce the deficit, Ronald O'Hanley, president of Asset Management and Corporate Services at Fidelity Investments, argued at a speech to the U.S. Chamber of Commerce Wednesday. Most retirement programs are tax deferrals, not tax breaks, he argues: Savers pay taxes when they withdraw. "Not only will such a proposal further challenge retirement savings, it will not generate additional revenue," he says.

It's news to the extent that the details go counter to the Obama and Democratic party PR meme re enforcement of Dodd-Frank (yep I know its only been pr and never really true). I was gonna add that myself, but it's worth mentioning how its still going on, business as usual, although that's no surprise either.

One bill that sailed through the House Financial Services Committee this month — over the objections of the Treasury Department — was essentially Citigroup’s, according to e-mails reviewed by The New York Times. The bill would exempt broad swathes of trades from new regulation.

Grassley said in a statement late Wednesday he had not heard from the White House about Comey's nomination but said Comey possessed a lot of important experience on national security issues.

"But, if he's nominated, he would have to answer questions about his recent work in the hedge fund industry," Grassley said. "The administration's efforts to criminally prosecute Wall Street for its part in the economic downturn have been abysmal, and his agency would have to help build the case against some of his colleagues."

that basically makes sense. iirc lots of components of bank operations are in london instead of e.g. ny because of different regulations. including, especially, the ability to take something you've gotten as a swap from someone else, and in turn engage in a swap with it, etc. so that big pools of capital can be generated from just swapping the same things back and forth.

thing is my cousin is genuinely a good man.he has a big heart and is not the oliver stone cliche.and given my insight, he clearly is at war with his inner world.but he has a certain financial demand now (wife, staff, kids, private schools etc in that order), and so has to maintain a certain level of lifestyle.so, while his world may look special from the outside, give me the stress free lifestyle that i have built up instead anyday.despite the stupid bonus, poor f*cker has it tuff.seriously.i like being 'normal'

sometimes a person builds his own prison and then loses the key -- not the most sympathetic case when the prison has jacuzzi hot tubs and 5,000 square foot loft-style cells, but still, a person can get himself on a path and have trouble getting off

Recently, Mr. Schumer, Ms. Gillibrand and four other Democratic senators wrote to the Treasury secretary, Jacob Lew, seeking his help in shelving crucial “cross-border” guidelines on derivatives from the Commodity Futures Trading Commission. The guidance makes it clear that numerous new derivatives rules under the Dodd-Frank law apply to foreign affiliates of American banks and to foreign banks operating in the United States.

Without strong cross-border rules, derivatives regulation will be meaningless because big American banks that dominate the global market in derivatives will simply engage in risky trades and rank speculation abroad. When those risks and wagers go wrong, American institutions and American taxpayers will be on the hook — again....Mr. Schumer, Ms. Gillibrand and their four colleagues are not only going against lawmakers in their own party, most of whom have resisted attempts to delay the cross-border rules. They are also going against the cause of reform, lobbying for delays that would derail the law.

Advocates contest the notion that calculating the ratio is impractical. “That’s absurd. It’s not that complicated,’’ said Lisa Donner, executive director of Americans for Financial Reform, an umbrella group of organizations pushing for the pay ratio. She accused the SEC of “bowing” to industry lobbyists and ”slow-walking” the issue.

With conservative dominated courts blocking rules that could be effective (see below), at least providing further information on pay ratio seems to be all that's left

A federal appeals court in the District in July 2011 blocked the SEC’s “proxy access” rule, a requirement under the Dodd-Frank law that would have made it easier for shareholders to oust members of corporate boards and nominate new ones.

In a lawsuit brought by the U.S. Chamber of Commerce and the Business Roundtable, the court blasted the SEC for failing to fully consider the economic impact of the regulation. The decision cast a pall, forcing the agency to devote far more time to analyzing the costs of its proposals, including the pay ratio.

You buy the reasoning that the companies oppose it? Information to the public is good even if it alone won't change anything.

― curmudgeon, Monday, 8 July 2013 16:56 (2 days ago) Permalink

I don't see it as providing all that much "information." The CEO's total compensation is already publicly disclosed. The median employee's compensation --the bottom part of the ratio -- isn't, but it's not going to vary that widely from huge company to huge company.

So why do you think the big corporations so engaged in opposing this? They just don't want to do the math needed to calculate the ratio? Or do they just automatically oppose anything Congress wants them to do.

tbf probably because it has bad optics for them, which I guess is maybe part of the idea -- give people another stick to beat them with. There's already the say-on-pay provision in effect (non-binding shareholder vote approving/disapproving executive pay) which I think is more useful.

That's probably also true. I don't think it would really be that hard to calculate, but they don't want more news stories that say "CEO of XYZ Corp. tops the CEO pay ratio list for 2013" or whatever, and this just gives one more tool to write stories like that.

Simon Johnson has explained, “Geithner came to stand for providing large amounts of unconditional support for very big banks…” at the New York Federal Reserve and continued this pattern in Washington. He favored unqualified assistance to troubled banks

The banking world is very grateful for Geithner’s championing of their interests over the public’s. Just six months after he left the Treasury in January, it has showered Geithner with cash. Deutsche Bank lavished him with $200,000 to speak at a conference in June. Private equity groups are also shoveling over piles of dough: Blackstone and Warburg Pincus paid Geithner $100,000 each for recent speaking engagements.

becoming a public interest attorney for the gov't is a pretty good way to get a nice cash payout at the end of the road. i feel like it incentivizes playing it light on the industry you're regulating when you're looking at your long-term career prospects.

when my uncle was at the state AGs office he was offered a hefty salary to join the guys he litigated against. he refused, but it was a shit load of money and my family was pretty pissed he didn't take it. he didn't because he actually believed in the work he was doing... and there aren't enough people like that out there.

With all of her stuff either sold off by the bank or thrashed, the homeowner presented the bank's president with an $18,000 estimate for restitution.

He refused to pay up.

"He got very firm with me and said, ‘We’re not paying you retail here, that’s just the way it is,’" Barnett recalled. "I did not tell them to come in my house and make me an offer. They took my stuff and I want it back."

In litigation jargon, we call a guy like that a fucking moron who really wants to get sued.

it occurs to me that investment banking is kind of like organized crime, inasmuch as it's easiest to bring charges against the lowest level people because they do the actual dirty work. Unfortunately there's no SEC equivalent of RICO.

You can charge business folks with operating a criminal conspiracy, however. You can prosecute the case similar to RICO that way.

The prosecutors had a list of up to 200 unindicted co-conspirators in the Enron case that the defense wasn't really allowed to talk to and people who knew they were potential targets wanted nothing to do with running afoul of the DOJ and go from unindicted to indicted co-conspirator.

I had dinner with him last year, without knowing who he was. Huge fan of Big Bang Theory

He came across as a really nice guy, tbh. There's no doubt he acted unethically and illegally but he did so in an environment that actively encouraged it. He was completely hung out to dry by people far more culpable than himself. It goes to show that you do literally need to have written e-mails bragging about all the shady stuff you're up to to get convicted.

if you ask me the differences between enron and the parties involved in the housing crisis are negligible. both were trading in derivatives that spiraled out of control, both played fast and loose with the rules but technically still followed them once they pushed them to their logical extremes.. enron just got caught all by themselves rather than in a whole crowd of people robbing the bank at the same time.

the differences are big when it comes to actually proving some kind of criminal conspiracy -- in one case you have an entire fraudulent enterprise, in another you have organizations that do a million different things, a small subset of which are arguably fraudulent. It's not so easy to argue that the entirety of Citigroup is a criminal conspiracy for putting together bad mortgage-backed securities when they're also running a commercial bank and putting out analyst reports on stocks and doing boring bond issues and all that other stuff. And it's not so easy to get Citigroup top executives for that reason, unless you can show direct knowing involvement by them in the fraud.

how you estimate the future risk of collateralized debt is one thing. just not marking down losses or buying propping up your own assets with bogus loans from shell companies is something else entirely.

■ The banks’ 25 percent hit is nothing compared with the 90 percent cut to pensions suggested by the city — a cut that would be disastrous in both human and political terms and that the State of Michigan must prevent from happening.

■ Municipal officials are prey for Wall Street. The Dodd-Frank financial reform law called on regulators to establish “enhanced protection” for municipalities and other clients in their dealings with Wall Street, but the Securities and Exchange Commission has not yet completed rules, while the Commodity Futures Trading Commission’s rules are so weak as to virtually invite the banks to exploit municipalities.

■ The special treatment banks receive when debtors are in or near bankruptcy is unfair and economically destabilizing. Detroit’s agreement with the two banks requires court approval, but, in general, swap deals by banks are not subject to the constraints that normally apply in bankruptcy cases; in effect, the banks are paid first, even before other secured creditors and certainly before pensioners. That privilege, dating to the heyday of derivatives deregulation in the 1990s and 2000s, is destabilizing because the assurance of repayment fosters recklessness.

how you estimate the future risk of collateralized debt is one thing. just not marking down losses or buying propping up your own assets with bogus loans from shell companies is something else entirely.

There was one intern who was so terrified of being seen to be leaving the office that if he didn't have work to do he would do 'practice' work until late into the night and come in at the weekends just to show his dedication.

OK someone explain a thing to me that I have never understood. Today's MSFT/NOK deal is a perfect example. Microsoft is paying $7B for the handset unit of Nokia. Nokia's market cap goes up by about 5.6 billion, and Microsoft's market cap goes down by about 12.7 billion.

How can this be? Let's say I own a house outright. It's worth $300,000 and I sell it to you for $300,000. Isn't the net change to my net worth "0" and the net change to your net worth "0"? Yet by giving $7B in cash for a business, Microsoft's net worth goes down by $12 billion. Even if that business were WORTHLESS, hasn't Microsoft only lost $7B? Or is it the fact that the business is expected to incur future losses that will cost Microsoft the equivalent of a present value of an extra $5 billion on top of the $7 billion they paid?

maybe it would be better to think that your mortgagee has downvalued the house because someone has just dumped three hundred tons of turd in the garden and the house has a history of having turds dumped on it in the last decade

they don't need to think about it in direct monetary terms. it could just be a feeling that this signals microsoft is making bad decisions in general, and they don't trust its 'mobile strategy' or the like

Well Nokia phones run windows so there are *some* synergies. I mean that's the point of the deal, to attempt to create another competitor in the smartphone market -- Microsoft's full muscle and cash behind the phone line instead of just providing the OS while Nokia struggles.

Markets are brainless. This fact is obscured because that participants in a market all have brains. However, those brains are not wired together in a way that can emulate a real brain. Instead, the connections between participants are contingent, minimal and often ephemeral. This greatly limits the amount of common information a market can assemble and act upon, so that market behavior is less coordinated and sophisticated than, for example, a cockroach's behavior. Because a cockroach at least has a brain.

I don't know what the majority of cases are like, but I have certainly seen deals where this is not true. But I think you're correct that there's a sense of certainty (company A just got a bunch of cash, the most certain thing of all) versus uncertainty (company B just bought a business that it may or may not be able to run well, that may or may not have a good future for various unknown reasons, etc.).

Even if Lehman Brothers had collapsed without anyone knowing, we still would have had mass foreclosures devastating neighborhoods and underwater mortgages driving the Great Recession. There still was an entire Wall Street pipeline designed to deceive both borrowers and investors. There still was a derivatives market designed to distort the price of risk while also creating instruments designed to fail.

upshot: S&P overrates bonds --> overrated bonds fuck up the economy --> S&P pulls back on overrating bonds --> S&P realizes it isn't making as much money as it did when it overrated bonds --> S&P starts overrating bonds again

well probably yeah actually. mainly people care about ratings because there are regulatory reasons where you are only allowed to hold things with certain ratings (if you are a pension fund or etc) or if you hold things with lower ratings then you need more cash on hand to cover them (if you are a bank or etc)

the problem isn't "this arbitrary stupid system of assigning letters to products as though it reflects their risk of default when it is based on measuring something else entirely, and then enforcing investment based on it is in the hands profiteers" it is that this is a stupid arbitrary system to begin with.

xp But the alternative is for each institutional investor from CalPERS to the tiniest municipal firefighter pension to independently evaluate the risk of every offering, and that just doesn't seem like an improvement on the current system.

I mean really the morons he's arguing with are right on the big picture in spite of saying a lot of wrong things. From the point of view of shareholders, Dimon is great. Pareene isn't really making a coherent case for Dimon to be fired, he's just saying JPMorgan bad.

As I left the trading floor, I immediately took a wrong turn and was reoriented toward the exit by a friendly, silver-haired gentleman in a very nice suit. “What were you talking about?” he asked, recognizing a wayward CNBC guest. “JPMorgan,” I said. “I was sort of the liberal punching bag.”

His expression became briefly chillier, but as we left the building together he smiled. “The fines? Well, guess we’ll just have to raise fees!” And then he walked off and I got on the subway.

On Saturday, the news broke that JPMorgan is on the verge of reaching a settlement with the Department of Justice for the biggest bank penalty in U.S. history: $13 billion for mortgage lending abuses allegedly committed during the housing crisis.

But as this story makes waves in the media, one thing has gone unnoticed: Taxpayers could end up underwriting more than $4.5 billion of the settlement. That's because JPMorgan is likely to claim the settlement for wrongdoing as a deduction from their taxes.

We can’t let that happen. The DOJ has the power to deny the deduction, but they need to know that we’re watching.

that's because JPMorgan is likely to claim the settlement for wrongdoing as a deduction from their taxes.

This is kind of a misleading way to put it, at least as I understand it. The settlement cannot be a "deduction" from their taxes, only a net loss would be. There's no special "tax deduction" for corporations for settlements. In other words, if they would have made $11 billion profit in a year, but they have to pay out $13 billion in the same year, they'd have a $2 billion net loss for tax purposes. BTW, their profits last year were over $20 billion, so I don't see that happening.

Like if JPM has a year where they make less money, they pay less taxes as a result, it's just how taxes work. We don't say "the public was forced to subsidize JPMorgan's disappointing revenues from mortgage banking" or whatever.

My understanding is that the company would just agree not to deduct that settlement from their income for the year. I don't see why this would require treasury or SCOTUS or any other approval since no one is required to deduct anything from their income.

Although some civil settlement payments are deductible, their deterrence factor could be lessened if companies can deduct certain settlement payments from their income taxes. GAO was asked to (1) identify federal agencies that negotiated some of the largest dollar civil settlements, (2) determine whether selected federal agencies take tax consequences into account when negotiating settlements and officials' views on whether they should address payment deductibility in settlement agreements, (3) determine whether companies with some of the largest civil settlement payments deducted any of the payments on their federal income taxes, and (4) determine what information the Internal Revenue Service (IRS) collects on civil settlements reached by federal agencies.

Some DOJ environmental settlements with civil penalties have language stating that penalties are not deductible. DOJ officials said since the law is generally clear that civil penalties paid to a government are not deductible, stating so in the agreement was merely restating the law and is not necessary. The majority of companies responding to GAO's survey on how they treated civil settlement payments for federal income tax purposes deducted civil settlement payments when their settlement agreements did not label the payments as penalties.

Don, this is kind of common sense really -- have you ever done your own taxes? There's no law that requires you to take any deductions at all. You could choose not to deduct your mortgage interest, your charitable contributions, or whatever. It's not illegal to pay MORE tax. Plus the language in the goldman thing kind of suggests this:

In yesterday’s settlement with the U.S. Securities and Exchange Commission, the firm agreed “it shall not claim, assert or apply for a tax deduction” for any penalty amounts. Goldman Sachs will pay a $535 million civil penalty, which normally would be deductible, and give up $15 million in profits, which the firm likely can still deduct.

Yes, it's common sense and I'm a bit dim for not considering that angle (and yes I claim all deductions) but corporate tax strategy on corporate entities that large is usually wide ranging (both in terms of scope and time); something like this would have a huge impact on planning (although I suppose it is mitigated by the amount of time it takes to settle.) I assume you see a bit of tax planning with your clients?

Never really thought about the tax consequences of a huge settlement before.

The House is scheduled to vote on two bills this week that would undercut new financial regulations and hand Wall Street a victory. The legislation has garnered broad bipartisan support in the House, even after lawmakers learned that Citigroup lobbyists helped write one of the bills, which would exempt a wide array of derivatives trading from new regulation....The House proposals stand little chance of becoming law, having received a much chillier reception in the Senate and at the White House, which on Monday threatened to veto the bill on investment advice for retirees.

But simply voting on the bills generates benefits for both House lawmakers and Wall Street lobbyists, critics say. For lawmakers, it comes in the form of hundreds of thousands of dollars in campaign contributions. The banks, meanwhile, welcome the bills as a warning to regulatory agencies that they should tread carefully when drawing up new rules.

...Wall Street’s support from the House extends beyond favorable votes. When bank executives are called to testify before Congress, industry lobbyists distribute proposed questions to lawmakers and their staff, seeking to exert some control over the debate, according to emails written by staff members on the House Financial Services Committee that were reviewed by The Times...

...But it is possible that lawmakers will quietly tuck the provisions into a broader budget deal at the end of the year. And even if the Senate balks, the House bills can still send a powerful message to regulators drafting new rules under Dodd-Frank: slow down.

The bills, advocacy groups say, have a chilling effect on regulators, who have completed only about 40 percent of the rules required by the law.

as stated above, it's not exactly accurate to say that the settlement could "save JPMorgan nearly $1.5 billion in taxes." The settlement is still a loss, so it's not like they're really "saving" money.

All the people in power, regardless of party, seem to think that the less ordinary people know about how political power operates and the less those folks participate in it, the better the system works.

Warburg Pincus has also taken stakes in banks aided by taxpayer dollars through TARP. That includes Webster Financial, a New England lender in which the firm reaped a return of about 35 percent. Another was Sterling Financial, a Washington State institution in which the buyout firm invested $139 million; it was sold two months ago to another bank, Umpqua, for $2 billion.

Same ol', same ol'. Although Geithner had given interviews as recently as when he was leaving the Treasury job noting that he was unlikely to go this private route because he had always worked in the public sector.

Thirteen billion dollars is a lot of money — the biggest fine for one company in U.S. history. But it only represents about five months of JPMorgan’s operating income in 2013, and it’s barely more than a third of what JPMorgan is spending on lawyers to defend itself.

Mounting legal costs from government proceedings pushed JPMorgan to a rare loss in this year's third quarter, the first under CEO Jamie Dimon's leadership. The bank reported Oct. 11 that it set aside $9.2 billion in the July-September quarter to cover the string of legal cases against the bank. JPMorgan said it has placed $23 billion in reserve to cover potential legal costs.

Also, Holder is getting credit from some in the mainstream press because this 13 billion is the biggest deal ever, and JP Morgan originally only offered 3 billion total. But yes still chump change to this entity

dayo otm. 13 billion is never chump change, but the amount of pain it represents to JPMorgan barely rises to significance and will soon be forgotten. that's the whole reason why they settled for 13 billion. if it really hurt them, they'd have kept this tied up in court for decades.

Meanwhile, almost all of the deal, save a $2 billion penalty to the U.S. Attorney’s Office in Sacramento to settle a civil lawsuit, is tax deductible as a business expense. Assuming a 38 percent rate for deductions (as JPMorgan does) on $7 billion in business expenses, this knocks another $2.66 billion off the real cost to JPMorgan Chase. A ballyhooed $13 billion settlement winds up being closer to $2.74 billion. That’s less than what BP or GlaxoSmithKline paid in their Justice Department settlements.

I don't follow where he's getting $2.74 billion. It says the $2 billion penalty to the US Atty's office is non-tax-deductible, so that would leave only $0.74 billion coming out of the rest of the settlement.

You've got a point. But yep a finger in the dike, watered down moderate Dem judge upholding watered down regs, is still better than "hey lets let 'free' market work, as long as its helping ceos we want helped"

Not sure what to think about that, honestly. Seems like a guy who's self-reflective about being a general destructive shitheel on Wall Street, and is trying to go the opposite way. But the damage is already done, isn't it? I suppose it's better than being totally unrepentant. That line about him making more in a year than his mother made her entire life being inconcievably unfair rings true, as the sentiment usually does. I'm not saying he needs to burn all his assets and live in a monastery, but of course you can do what you want now when you have millions in the bank and your future grandchildren are pretty much taken care of for their lives. Still, at least seems like an honest piece.

I always sense a little bit of "everyone look at what a good boy I am" in these repentant op-ed pieces, like the same impulse that drove him to seek the "feedback" of money now drives him to seek the feedback of approval. Still, better the latter I guess.

i think lots of ppl probably get "enough" money, which is a big chunk, and eventually have that realization one way or another -- "I can do whatever I want, I'm set" and go do something else, typically with less fanfare.

otoh there's the famous wall street folktale wherein one trader says to the other "You know man, if I ever made ten million, I'd just fucking quit right there," and the other says "that's why you'll never make ten million

Read Michael Lewis's first book, now reading Barbarians at the Gate. Disappointed in the first, I was expecting more depth into what life was like as a trader/salesman in that era; BatG hasn't gotten to the real drama yet.

xp, right, I think that's the idea, that it takes bottomless hunger for money to make large amounts of money, at least as a trader. My mom went to high school with a guy who made fuck you level money as I guess sort of a quant/hf guy and isn't like that -- quit to take care of his kids, doesn't believe in tax avoidance strategies, etc. But that's probably not all that common.

like this points to the growth of the finance sector thu the 80s, and that makes sense. but the recent portion bears some interpretation (the huge blip in the 'net' investment line makes this double clear).

the main reason rent doesn't decrease proportional to gross investment is inertia. like these are huge sectors of the economy. just because we had a huge economic contraction for a span of years doesn't mean that these companies just shut down.

cash moves in and out of markets quickly, companies don't grow and shrink at the same pace usually. in any case, a better comparison if one is made at all would probably be something about rent vs. capital flows not absolute investment

the more I think about it, I'm also not sure the way they're doing "gross" and "net" investment makes sense either, and I'm also not sure if looking at a "per dollar DIRECTED (invested)" figure makes sense.

also i think the fact that finance as a sector gets a certain chunk of money is a bit point-missing because that accounts not just for fees paid to brokers, or money managers taking 2-5% off the top, but also the amount actually held by these firms. So say like GM makes a profit building cars or whatever. Now of that profit, a chunk gets paid out in dividends. And of the gross profit, a chunk gets paid out in returns on bonds GM has floated in the past. So some of those dividends and coupon payments go to financial firms that hold stocks and bonds, and they get marked as profit.

But this isn't different than that going to Johnathan D. Rich Person III, who bought that stuff himself.

Its not like finance "took" that profit from somewhere else. Its just that these firms are sitting on cash and invested it.

Consider also that maybe GM does well and the stock goes up in value (and the bonds go up too because the rating improves or whatever). Now again the holder accrues value they can book as profit. But nothing actually happened! Value was just "created". Until they sell out of those positions, nobody actually took profit there.

You don't have like "good industries that make things" on the one hand and "evil banks that don't make things" on the other and like if money flows to the latter then that means that that's taken from the former in some sense. finance has a very specific relationship with other sectors of the economy.

vital is pushing it. i realize my above was imprecise too. i should have said "good capital that invests in productive industry vs. evil capital that operates via finance" because the point is finance capital is just another route to the same place.

You don't have like "good industries that make things" on the one hand and "evil banks that don't make things" on the other and like if money flows to the latter then that means that that's taken from the former in some sense. finance has a very specific relationship with other sectors of the economy.

I think you're right to an extent. The article was more trying to make the argument that Wall Street is somehow extracting much more payment from everyone for the same arguable services than it used to. I'm not sure the methodology it used really makes sense though.

But what wall street "does" is actually a lot of different things of what I would say are widely varying degrees of usefulness (or harmfulness) to a capitalist economy. It's certainly important to the efficient allocation of capital and all that, and at the same time it's laughable to suggest that that's all they do, and I wonder if it's even a majority of what they do. Would be fascinating to see very detailed research showing a breakdown of the activities of the banking sector.

Also, the runup to the financial crisis is probably one of the greatest examples in history of massively, horribly INEFFICIENT, WRONGHEADED allocation of capital. And that came on the heels of the dotcom boom and bust. So the last few decades have not been a very good argument for our banking system being good at allocating capital.

Not really sure about that, given the amount of wealth that has been "created" as a result of our banking system (and by "banking system" what are we talking about as components thereof? Not really sure where to begin and end.)

The article was more trying to make the argument that Wall Street is somehow extracting much more payment from everyone for the same arguable services than it used to.

There's an interesting recent article from Larry Summers on inequality that seems to contradict that:

It is certainly true that there has been a dramatic increase in the number of highly paid people in finance over the last generation. Recent studies reveal that most of the increase has resulted from an increase in the value of assets under management. (The percentage of assets that financiers take in fees has remained roughly constant.) Perhaps some policy could be found that would reduce these fees but the beneficiaries would be the owners of financial assets – a group that consists mainly of very wealthy people.

Yeah I was gonna say "um, pension funds?" And then I figured oh well it's larry summers and he probably knows his shit, so is it possible that there's really more money under management from wealthy individuals than pension funds? But that doesn't fucking seem right, so I say Larry Summers is being disingenuous, so fuck that guy.

I'd be stunned if there was more money under management from wealthy individuals. In fact, I can almost guarantee that there is no way that is true.

But I think what Larry is saying is what I alluded to--management fees as a percentage of assets hasn't changed. For example, most management fees are 1-2% no matter the increase or decrease in assets and that hasn't changed in decades. What I think Larry is saying is that assets have grown, not the raw percentage fee. He's probably saying that assets have grown, and thus there are either a) more managers making 1-2%, b) the same number of managers making 1-2% but their compensation rose commiserate with asset value, or c) a combination of both. Or am I reading that wrong?

I think it's fair to say that financial asset management fees are *disproportionately* paid by wealthy people. Sure there are big pension funds but how many individual people do those funds represent? So a reduction in financial fees will help your average rich dude a lot more than your average middle-class dude.

The ratio grew slowly from around 1.3x to around 1.8x from the '50s to the early '80s, then it took off and never looked back. Since the Great Recession it's stabilized at around 4.5x. So yes, it appears that the amount of financial assets have grown dramatically relative to the size of the economy since the early '80s.

I'm sure they do take fees into account when choosing managers, but that's probably a lower consideration than reliability, competence, track record, etc. You don't necessarily want to entrust your pension fund to the lowest bidder.

probably can attribute that to growing global economy, increase in efficiency, and other stuff (monetary policies?) ?

Yeah, it's a pretty interesting question actually. I don't know what determines the "right" level of financial assets relative to the size of the economy. Definitely a part of it is the big bull run in stocks starting from the mid-80s as well as increase in housing prices and related mortgage debt as well as increasing government debt.

so to expand on the above because it was apparently confusing, if some financial holding company holds say $1M in GM bonds, then it has those bonds on its books as an asset, and it marks coupons received as profit. But GM also has that $1M on its books, as a current reserve of cash (although of course it has amortized future payments as an outstanding liability). So if there are many bonds held by many financial institutions, that _is_ one way cash is directed from places where it sits around to companies that want cash to do stuff. But the net effect of this is to make it look like there's more cash floating around in toto, since the bondholder and the bond recipient both "have" that money, sorta. This is related to the "money multiplier" effect ppl talk about.

So if you look at a financial institution's book profits or assets, they're not "coming" from somewhere else, they're just numbers on paper. what "comes" from somewhere else is the profits fully taken that flow out of the circulating economy to elsewhere. otherwise, that's really just not how finance works, which is not a normative value judgement, just a claim about how one understands accounting.

Ok similarly this "total financial assets" thing looks really impressive, right, but then google for a source and get this

So this A) gives a breakdown of the composition of those assets and B) also has a figure with a suspiciously similar number for "total financial liabilities"! So whoops, unless you net those out you're looking at a very meaningless number because if I promise to give you $100 dollars tomorrow and you promise to give me $100 dollars tomorrow then we both now have $200 dollars in assets (whereas, before, we presumably each only had the $100 we promised to give -- but if we timed it right we didn't need anything at all). But if we do the same thing with $1000 dollars, now we have $2000 dollars in assets.

i think they're marked in its books as a liability right away if you net it out. but remember they also mark e.g. the book value of their plants, etc as an asset.

like you don't actually typically want a really fat # at the bottom of your balance sheet (though you want to be comfortably in the black) because it indicates yr sitting on cash you don't know what to do with.

oh i forgot to mention in the above with the finance company holding bonds. if they are a pension fund they're doing it straight up, but like e.g. if they are a hedge fund or trading desk then they are doing it on margin quite often against assets held elsewhere. so that's another way in which for better or worse these sorts of practices make it effectively appear like there is "more" money than otherwise.

So this A) gives a breakdown of the composition of those assets and B) also has a figure with a suspiciously similar number for "total financial liabilities"! So whoops, unless you net those out you're looking at a very meaningless number because if I promise to give you $100 dollars tomorrow and you promise to give me $100 dollars tomorrow then we both now have $200 dollars in assets (whereas, before, we presumably each only had the $100 we promised to give -- but if we timed it right we didn't need anything at all). But if we do the same thing with $1000 dollars, now we have $2000 dollars in assets.

Right, and this is a pretty good explanation of why the total "notional" value of derivatives is pretty meaningless, and why scare stories about "five bagazillion dollars in derivatives!" are kind of meaningless.

So this A) gives a breakdown of the composition of those assets and B) also has a figure with a suspiciously similar number for "total financial liabilities"! So whoops, unless you net those out you're looking at a very meaningless number

I'm not sure the point here. Sure, when it comes to debt instruments and derivatives, one company's asset is another company's liability. (It's a bit different if you're talking about equity - stock outstanding is not a liability, it's invested capital.) The point I was trying to make was just to look at the asset side of the equation - specifically the assets of financial businesses. This is just to give a rough idea of the size of assets being managed by financial businesses in aggregate, in an effort to understand the fees that are paid for managing those assets and how they've grown faster than the economy as a whole. It does seem that the amount of those assets in the aggregate has grown faster than GDP.

oh and yeah about half that number does seem to be derivatives, classified as "credit market instruments"

on the latter, note you also have lines for "Financial business; corporate and foreign bonds; asset" and "Financial business; other loans and advances; asset" so that would cover most sources of debt i know of. credit instruments usually is a catchall for slightly difft stuff, typically derivatives.

on the former, yeah i guess i wasn't really arguing against you so much as the above-linked article that kicked this stuff off still. my one potential disagreement is that fees paid for managing assets are paid by people with "real money" i.e. pension funds etc. so total assets under management matter less in terms of this than "capital under management".

I can't find a standard definition of "credit market instruments" fwiw. There are lots of complex special rules for derivatives accounting in GAAP though, including rules that were added in the runup to and aftermath of the financial crisis.

Wall Street is warning Washington Republicans: The money spigot is turning off.Rep. Dave Camp’s tax proposal — which jacked up taxes on banks and threatens the bottom line of some major private equity players in New York — has infuriated donors in high finance.Private equity and investment firms in New York are telling key Republican players in D.C. that commitments for big-dollar fundraising have been “canceled for the foreseeable future,” according to one GOP lobbyist with knowledge of the conversations….Big banks want to turn Republicans against the bank tax. The situation puts the party at risk of seeing a reliable source of campaign cash dry up right in the middle of a critical election year.The tax proposal itself is not even expected to get a vote in the House, since it’s so unpopular among most Republicans. That Wall Street would react so ferociously to a dead-end bill is a reminder of how hard a powerful player is willing to fight to protect its interests in Washington

“While there are bad actors in every industry, the game is not rigged in the favor of professional traders who employ HFT to execute their strategies,” Peter Nabicht, senior adviser to the Modern Markets Initiative trade group and former chief technology officer at high-frequency-trading firm Allston Trading, wrote in an e-mail.

“Rather, they work hard to compete with each other to bring liquidity to the markets, benefiting average investors,” he added. “Continued debate about the next evolution of market structure is needed and welcome, provided the debate is based on fact and resulting actions are reasoned, ensuring average investors continue to benefit from the transparency and efficiency enabled by inevitable technological advances.”

high frequency traders are barely gambling, they're more skimming. Cynical me says that the purpose of securities regulations is to maintain the pretense of a fair stock market so the dumb money doesn't get scared off. If this story has enough legs, something will be done about HFT for that reason, but the average person's chances of doing well in the market won't get much better.

Yeah, I guess they at least have the sense to not go asking for handouts. But like you said, they are basically just skimming. Seems like the same software that is doing HFT could also stop trading pretty quickly if one of the competitors gained an advantage.

Buddy here at work told a story of his banker friends who figured out that a certain exchange would reboot their routers at a certain time, and then give priority to whoever had the lowest IP addresses (given out through DHCP). So the bank set their servers to renew their DHCP addresses a couple of milliseconds after the reboot, thereby ensuring they would be first in the queue. You know, to increase liquidity and benefit average investors...

After reading both the Lewis article and the "counterpoint" I'm still not sure I understand whether HFT is actually driving up the costs for the end buyers and sellers or just capturing a little of the spread that previously would have been taken by ordinary traders.

There may be HFTs doing genuine market-making, which arguably could benefit other market participants, but in the more clearly abusive cases, such as "slow market arbitrage", it's hard to argue that they're benefiting anyone other than themselves, IMO. They seem to drive up prices mainly for large institutional buyers who face the problem of executing large orders that can't be filled all at once. The impact is probably less for individual traders, except indirectly through mutual funds and such.

So this might sound a little stupid because I don't think I fully understand spreads and market-making, but here's where I'm confused. I get the general idea of how they're front-running the order: institutional investor wants to by 100K shares of ACME, and in order to purchase that kind of volume they buy on several different exchanges. But because the order gets to one exchange a few tiny fractions of a second earlier than it gets to the others, HFTs are able to get out ahead of the order at the other exchanges. What I don't understand is, what are they then doing? They're purchasing the shares before the institutional investor's broker can and then very slightly hiking the price? To more than the institutional client bid? What if the institutional client balks at the new higher price?

I just assume it's a bunch of algorithms manipulating various positions to disrupt the market and skim off the top of the transaction they're about to make. I think these kinds of trades involve a shit ton of money but I also didn't rtfa

What I don't understand is, what are they then doing? They're purchasing the shares before the institutional investor's broker can and then very slightly hiking the price? To more than the institutional client bid? What if the institutional client balks at the new higher price?

Re: Salmon - I think he's forgetting that for most people, the bulk (if not all) of their investments are in their pensions/401Ks. And it sounds like it's those type of funds that are getting screwed by HFT.

If anything this is the most recent story in a long chain of 'the market is rigged' quasi revelations of the past couple decades. if you didn't know the market is rigged already you're not paying attention.

then again I've had all my money in a savings account for the last decade like a fucking asshole so what do I know

NEW YORK (Reuters) - U.S. stocks opened the second quarter on a higher note on Tuesday, with the S&P 500 hitting >>>a record high<<<, after data on manufacturing indicated economic growth was gaining traction after a harsh winter.

^Part of the reason for lack of traction? Market is up like 125% in 5 years.

Looks like we are hitting not only a nominal but nearing a real (inflation-adjusted) high in the S&P. However, earnings are also nearing a high. BUT, P/E looks high historically -- not insane high, but like probably ready for a correction high.

the article salmon links to that he wrote earlier on HFT points to the real issues.

if it really is just skimming fractions of pennies whatever, but the problem is they do much more than that and occasionally go nuts. also when something goes wrong everything goes massively out of control quickly, and furthermore they only 'provide liquidity' when everything is already liquid. the moment there's a disruption they pull out entirely and things go massively jagged.

the problem i'd imagine for the book is that getting ppl to talk about their weird prop algos is _hard_, but getting them to talk about being "more efficient" by a fraction of a second is the sort of thing they're not afraid to play up.

I think some of the "pro" arguments are making it sound like these company's just narrow the spreads, but my impression is that they actually inflate the price very slightly.

And yeah there is more stuff that HFTs do than just this kind of quasi-frontrunning, and I agree that the "provide liquidity" argument doesn't seem to make much sense, or if it does there's just something I'm not understanding. If 100,000 shares are already available for sale and all an HFT does is instantly buy and resell them, that might increase trading volume by a lot but it doesn't seem to truly increase liquidity in any meaningful sense.

lewis is a great writer tho and the excerpts are just excerpts so i'll read the real book and see then.

(nb: i've met people at hft shops that really are pretty simple stuff, in the main [or at least rumored to be, they're not allowed to say], and also have met ppl at other more hedgefundy hft shops, and the ones at the fancier ones from what i've heard look down at the other guys as chumps who don't like to take risks. also the _exact same_ sort of not-really-frontrunning happened way before hft and electronic trading took off, because at human scale time you can still spot the pattern of a big order being chunked out in blocks and get ahead of it)

More Felix Salmon (I think. I have not compared to the earlier Salmon Reuters article linked above)

But what we’re seeing, in the world of HFT, is not fraud, nor is it insider trading. Rather, HFT is a ridiculously and unnecessarily complicated mechanism for divvying up intermediation revenues between banks, exchanges, high-tech telecommunications outfits, and various algo-driven shops. Everybody is in on the game: not just the HFT guys, but also the exchanges, which optimize themselves for HFT game-playing, and the banks, which let HFTs into their dark pools, and especially the SEC, which has been cheering on the whole motley crew from the beginning. Even the big money managers are in on the act.

Nonsense. That's pretty much like saying "let's stop talking about Crimea because the real crisis is in (Syria, Palestine, ____)"

Besides, (1) I don't think we fully know the impact and/or potential impact of this stuff, and (2) in any case, the entire market has dramatically restructured itself in less than a decade, and it's something that needs to be better understood. Maybe it's not something the average person needs to care all that much about, but it's still an important topic.

Also, it seems to me like Wall Street and various trading firms feel very threatened by all this discussion. There's lots of spinning and covering and smokescreening going on. A lot of people with interests in this activity are unhappy about all the attention. That alone to me says we should look at it more closely. Goldman Sachs today announced that it's considering closing its dark pool all of a sudden. That sounds like anxious behavior to me.

I remember leftish publications making an issue over interest rate swaps that wound up screwing over municipalities/pension funds. That was an smaller issue in terms of magnitude of impact, and the banks' conduct there was more justifiable and less egregious. Skimming off small amounts from every trade a public pension fund makes still aggregates to a good chunk of money that does wind up costing individual retirees.

Big money and cutthroat landlords have never been strangers to New York’s real estate market. But the descent of private equity firms on the city in the early years of this century was so striking that housing advocates dubbed the practice “predatory equity.” The name refers to the tactics these companies resorted to once it became clear that longtime tenants weren’t going to leave.

...

For tenants, these private equity purchases were essentially a lose-lose situation. For the deal to succeed, tenants had to be forced out. If, on the other hand, the deal failed and tenants got to stay, landlords immediately disinvested from the buildings, making the living conditions worse than ever.

Well yeah, and I also found it pretty unconvincing that taking the wrong side of an interest rate swap was the same as "getting screwed" -- they just bet the wrong way on rates. So maybe a bad example.

Also, in re that landlord thing -- as I said in the other thread, I lived in a building that had been bought by Black Rock. We were market rate tenants, but there were a lot of stabilized tenants left. There was definitely an effort to push them out, although I didn't get the impression that they were denying basic services -- mostly more doing "improvements" to the building and then seeking rent board increases. They had a very good management company running the place -- at least they were good to us, perhaps less so to the stabilized tenants.

What strikes me about that nation piece and about the practice described is how NAIVE it actually sounds like some of these investment funds are being about owning and managing rental properties. Their assumptions just sound totally unrealistic.

The SEC has become “an agency that polices the broken windows on the street level and rarely goes to the penthouse floors,” Kidney said, according to a copy of his remarks obtained by Bloomberg News. “On the rare occasions when enforcement does go to the penthouse, good manners are paramount. Tough enforcement, risky enforcement, is subject to extensive negotiation and weakening.”

The U.S. Justice Department is pursuing criminal investigations of financial institutions that could result in action in the coming weeks and months, U.S. Attorney General Eric Holder said in a video, adding that no company was "too big to jail."

The comments, made in a video posted on the Justice Department's website on Monday, came as federal prosecutors push two banks, BNP Paribas SA and Credit Suisse AG , to plead guilty to criminal charges to resolve investigations into sanctions and tax violations, respectively, according to people familiar with the probes.

While Holder did not name any banks, he said he is personally monitoring the ongoing investigations into financial institutions and is "resolved to seeing them through."

Michael S. Barr, a law professor at the University of Michigan who was an assistant Treasury secretary when the financial crisis was at its worst, is working on a book titled “Five Ways the Financial System Will Fail Next Time.”

The first of them, he says, is “amnesia, willful and otherwise,” regarding the causes and consequences of the crisis.

Let’s hope the others are not here yet. Amnesia was on full view this week when the House Financial Services Committee held a hearing on “the dangers” of financial regulation. Mr. Barr, who helped write the Dodd-Frank financial overhaul law, was the sole witness who thought it made sense for regulators to study the asset management and insurance industries.

In his opening statement, the chairman of the committee, Representative Jeb Hensarling, a Texas Republican, proclaimed “it is almost inconceivable that an asset manager’s failure could cause systemic risk.” He also saw no danger to the system from insurance companies, which are “heavily regulated at the state level.”

Over the first decade of the twenty-first century, about 5.8 million U.S. manufacturing jobs disappeared. The most frequent explanations for this decline are productivity gains and increased trade with low-wage economies. Both of these factors have been important, but they explain far less of the picture than is usually claimed.

Since the 1980s, financial market pressures have driven companies to hive off activities that sustained manufacturing.

As someone who has been following wall street's rush into the rental housing market, I found this story interesting:

http://stream.wsj.com/story/latest-headlines/SS-2-63399/SS-2-536567/Housing Investors Settle Into a Holding PatternHousing investors are retrenching by becoming landlords.Investors Turn Focus to Generating Steady Income From TenantsWith bargains less plentiful, large housing investors are slowing property purchases and turning their focus to generating steady income from tenants.

By Robbie Whelan, Conor Dougherty

After a buying binge that helped drive the housing recovery, big investors are being forced to rethink the home-rental business.

With bargains less plentiful, executives are slowing property purchases and turning their focus to generating steady income from tenants.

A spike in home prices over the past two years was quicker and more striking than many expected, squeezing returns and raising concerns about the industry’s growth prospects.

Small investors long have bought and sold homes. But two years ago when companies such as private-equity giant Blackstone Group LP got into the business, backers said it could emerge as an asset class rivaling publicly owned apartment-rental companies, which own over 600,000 units and have a stock-market value of $88 billion.

The companies jumped into distressed markets, buying foreclosed properties and other homes at depressed prices with plans to fix them up, rent them and eventually sell at a profit. But buyers have slowed their pace after acquiring roughly 140,000 homes worth about $20 billion.

The reason: the unexpectedly sharp recovery in the price of homes over the past two years. In housing markets hardest hit by the bust—places like Phoenix, Las Vegas and much of Southern California—prices have risen as much as 55% off their postcrash lows. Nationally, prices are up 11.4% in the past two years, according to Zillow Inc.

“The distressed wave has largely passed,” said Jonathan Gray, head of real estate for New York-based Blackstone, which has spent $8.6 billion on some 45,000 homes and is the biggest player in the sector.

At the peak of its buying in July 2013, Blackstone was spending about $140 million a week on homes; now it is spending roughly $30 million to $40 million. “We didn’t anticipate prices going up 20% a year,” Mr. Gray said.

Rising prices have forced many investors to accept lower returns than they originally had projected in certain markets, or to buy homes in new cities where the price appreciation has been less rapid. Two years ago, investors could buy in Sunbelt markets such as Phoenix and Las Vegas for gross yields that were in the 15% range, according to Green Street Advisors. That has fallen to around 10%, often lower.

Many investors have decided to hold onto homes for longer than they originally expected because a larger proportion of investor returns is coming from rent instead of the home’s rising value.

“The initial investment thesis was to invest in these homes, make a nice return on the way, and be positioned to sell them for a nice profit,” said Gary Beasley, co-CEO of Starwood Waypoint Residential Trust, one of four public companies in the business. “As we got into it in the first year or two, it became clear that it might be more valuable to hold onto these homes in the long term, and really treat them like a scattered-site apartment building.”

A recent Morgan Stanley report found that buy-to-rent investors have bought about $400 million worth of homes a month in the first few months of 2014, down from about $520 million a month last year.

Investor demand has cooled for stock in the four rental-home companies that went public to fund their expansion. Only American Homes 4 Rent has a stock trading above its IPO price.

Paul Puryear, director of real-estate research for Raymond James & Associates, said investors have been cool to the stocks in part because home-price growth has leveled off, and because the industry still hasn’t grown to a critical mass. “There are too many skeptics in the market,” he said.

Industry executives say there is plenty of money to be made from renting. They say more households became renters after the downturn because of the high rate of foreclosure and the inability or unwillingness of many to buy.

Indeed, apartment rents have been steadily rising for 17 quarters, according to real-estate data firm Reis Inc. They are now 11% higher than they were in late 2009 when they hit their postcrash low, Reis says.

Irvine, Calif.-based American Property Group’s search for yield in the Midwest is paying off, according to its CEO, Saman Shams. Recent acquisitions include a three-bedroom house with a big front yard on North Cherry Lake Lane in Indianapolis. About a month ago, the company paid $67,000 for the home and is spending $15,000 on renovations.

The plan is to rent the house for $1,150 a month. After costs, this will produce just under $10,000 in net income, or an annual net yield of 11.2%, much higher than the 5% to 7% net yields most investors are getting in other markets. “We’re holding these homes for the long term,” Mr. Shams said.

Analysts say the growth of the industry will depend in large part on whether investors can continue to get the better of traditional buyers. Investors have had an advantage in many markets because they have been able to pay cash and close quickly.

But that could change if the economy improves and mortgages get easier to obtain. Individuals may be able to outbid investors because they can get lower interest rates and aren’t as concerned about rate of return.

The banks are all paying with other people’s money.” And a $285 million fine for a bank the size of Citigroup, he noted, is so small that it barely qualifies as a cost of doing business.John C. Coffee Jr., a professor at Columbia Law School, called the ruling a “perfunctory” opinion and said it was a mystery to him why it took the court more than a year to write it. “An average law clerk could have drafted it in two days,” he said.

To my surprise, even prominent corporate defense lawyers who said they felt that Judge Rakoff had gone too far told me this week that they were troubled by the appeals court’s reasoning and its implications. (They didn’t want to be identified, since they litigate before the Second Circuit.)So, with these comments in mind, I decided to don some imaginary judicial robes and write a dissent — the opinion that, in my view, the Second Circuit should have issued. (I’ve omitted all citations and footnotes, leaving those to my equally imaginary law clerks.)...

As a matter of simple logic, Judge Rakoff’s position would seem to be unassailable. How can anyone decide a punishment is fair without knowing anything about what occurred?That’s not to say that judges shouldn’t pay deference to the decision of the parties to settle and the terms they have agreed upon. The parties should have wide latitude to settle cases as they see fit. Courts should defer to the agencies they oversee, and shouldn’t substitute their own judgments for the agencies’. Nothing is inherently wrong with allowing defendants to settle while neither admitting nor denying the accusations, although that should never be used merely as an excuse to avoid trial and might be used too often. I note that the S.E.C. itself has since said it will try to curtail the practice in appropriate cases.But neither should judges, as Judge Rakoff’s lawyer put it, be reduced to “potted plants.” To approve a settlement, judges need some facts. This court doesn’t have to decide how many are enough; that should be decided on a case-by-case basis. But I do note that in this instance, relatively few seem to be in dispute. The offering document prepared by Citigroup, which is at the center of the case, is a matter of record. It would seem relatively easy for Citigroup and the S.E.C. to stipulate to a set of facts sufficient to satisfy Judge Rakoff, especially since both seem eager to put this matter behind them.

Mr. Zucman estimates -- conservatively, in his view -- that $7.6 trillion -- 8 percent of the world's personal financial wealth -- is stashed in tax havens. If all of this illegally hidden money were properly recorded and taxed, global tax revenues would grow by more than $200 billion a year, he believes. And these numbers do not include much larger corporate tax avoidance, which usually follows the letter but hardly the spirit of the law.

I caught most of this while cooking supper over the weekend. I agree entirely. Was enraged by the jaw-dropping timidity of "Let's send Goldman Sachs a scolding letter; worst case is they ignore it." And the subsequent self-congratulation of "we fussed at them pretty good".

Very weird to me how Wells Fargo can get fined $185 million for opening fake bank accounts and issuing fake credit cards and the stock price basically doesn't budge. I realize that the $185 million itself is not a lot in the grand scheme of their earnings, but I would think the fake accounts part would matter. Maybe it's balanced out by their firing of 5300 employees -- wall street loves layoffs!

Yesterday’s Senate Banking Committee hearing on Wells Fargo should have ended with CEO John Stumpf hauled off in handcuffs. In a little over two hours, Stumpf revealed enough information, combined with what was already known in public records and filings, to make a powerful case for securities fraud. Specifically, that he touted fraudulent sales figures to investors as evidence of the bank’s growth, boosting the stock price and personally benefiting by $200 million. Worst of all, Stumpf used low-paid workers as the raw materials for this scheme, and as the scapegoats when it unraveled....

If the SEC and the Justice Department don’t get involved here, they might as well not even exist. CFPB’s Cordray and OCC’s Thomas Curry wouldn’t say whether they issued criminal referrals to law enforcement in this case, though Cordray hinted at it. Attorney General Loretta Lynch, if she wants to emerge from wherever she’s been hiding on this issue, has enough information to bring cases.

Will President Barack Obama’s administration end its tenure as it began, by refusing to prosecute systemic fraud in the financial markets? That’s the unavoidable conclusion so far.

Obama's doing $34,000 a plate fundraising dinners and then imploring money to get out of politics a day later. Sure, it's good theater to watch Warren put him on the hotspot but she'd never publicly go after the person who could actually launch an investigation: Lynch has always been a stooge.

Supposedly (according to the informational memo WF "helpfully" provided employees about this crisis) WF goes through 100k branch employees a year. I'm not sure how that was intended to reassure.. Branch employees (tellers, personal bankers, even sales managers) get treated like crap and not paid a living wage, yes, but that's an even larger issue than the small amount of people that were fired in connection with this.